Ten years ago, foreign business in China was dominated by large corporations’ intent on using China as a low-cost production base for their global supply chain strategies.
China’s entry in 2001 to the WTO, favorable exchange rates and low-cost land, labor and construction brought the world’s Fortune 1,000 to China’s shores.
At that time, selecting a location, registering a company, getting licensed, hiring employees and repatriating profits was an elaborate negotiation conducted with high-level government officials.
Then, meeting with a Central Government Minister or Vice Minister, Provincial Party Secretary or Governor to negotiate a memorandum of understanding (MOU) was routine. The size of the deals made them important. The negotiations themselves were often difficult, due to differences in language, culture, knowledge, expectations and legal systems.
Many companies relied on “Old China hands” to help them through the various steps. Unfortunately, many of them in turn, relied on “Chinese friends and connections” which could be hit-or-miss propositions.
The sea change
Today, while still a growing part of the global supply chain equation, China’s newly minted 300 million middle class consumers (people who can spend a third of their income on discretionary purchases) have shifted the economic emphasis from just producing in China, to include producing for China.
Despite a stronger RMB, more regulations and rising land, labor and construction costs; every cell phone, auto, cosmetic, clothing, shoe, accessory, athletic, jewelry, watch, and major restaurant chain and service provider in the world is in, or coming to China.
Add to this, local Chinese companies that have joined the competition, and you have a completely different economic vista from 10 years ago. Getting a meeting with a Central Government Minister or Vice Minister, Provincial Party Secretary or Governor, to negotiate a MOU is out of the question, unless it involves tens of billions of RMB.
Today, companies meet with City and District Party Secretaries, Mayors and their administrative bureaus and committees. Unfortunately, information about this level of government has not kept up with the times. City websites and promotion materials are not able to express their natural and developed advantages, specific goals and processes.
The second wave
The first wave brought the large and mega caps to China. The second wave, which in underway, are the entrepreneurs and businesses whose market capitalization is smaller than the multi-national corporations. The majority of these companies are not well known brands, but they are the companies that provide the parts, pieces, and services, which their Large and Mega Cap depend upon. They are, in fact, the main engine of the world’s economic development, they create the majority of jobs and they develop the new processes, technologies and services.
To someone outside of government, the structure of government, the difference between the Party and the Administration, the overlapping responsibilities and reporting can be bewildering.
Ironically, even as the rules and procedures local governments follow have become more standardized, they are less understood. Part of this is the fault of local governments, which are not yet able to express their stories clearly and simply. Part is a fundamental misunderstanding of how China is using cities as economic engines. Part is due to the sheer size and number of local governments. The rest of the fault belongs to the constant negative anecdotal chatter, media reports and books about business in China, which still emphasize guanxi (connection), opaqueness and problems, rather than providing details and road maps.
As new generations of city leaders emerge, they bring with them new skill, knowledge and experience sets. Today’s municipal leaders in China bring backgrounds ranging from medicine, history, economics, business, teaching, military, law and literature. They train regularly at the different level party schools. Some have worked their way up from laborers. Some joined later in life. Most have been abroad on study missions. Many speak at least one foreign language, and all have extensive experience in administration and multiple municipal departments. Unfortunately, public relations and investment promotion are not as well-covered yet, and due to a lack of high quality translators, the message is often lost in a bad mixture of Chinglish (A mixture of English and Chinese) and official speak.
China cities as economic engines
Understanding how the central government uses its cities as economic engines is vital to you if you want to manufacture or sell in China. The concept of a city as an economic engine is difficult for most foreigners. It runs counter to our notions of cities, as naturally occurring centers of trade, power and culture, which can be managed but not readily changed. In contrast, Chinese cities are transitional, not static. Twenty-year-old buildings are torn down and replaced; industry clusters are recruited, created and then moved; people are relocated from unsustainable to sustainable areas. The only constant is government policy and planning. Under this system, cities are defined, created, expanded and altered based on the economic and social goals of the central government rather than the dictates of local residents and officials – a steep departure from the norms in most developed countries, but one which is propelling China further and faster than any other county.
The components of Chinese city planning are: careful assessment of the area’s natural advantages; a development master plan that includes infrastructure investments; targeted industry activities; and a ready supply of people. The local Party and Administrative leadership are responsible for implementing the physical improvements and then recruiting investment and businesses to realize the plan. To help, the local government is given a toolbox of business incentives to work with, as well as training and support.
However today, because of the sheer number of cities and districts looking for investment, their lack of visibility, investment promotion experience and business friendly information, they are struggling to distinguish themselves. At the same time, domestic and foreign businesses are growing increasingly more sophisticated and are looking for more comparative information on land, labor, construction, resource availability/price, demographics, financial incentives, logistics, existing and planned industry clusters, the goals and quality of the local government and the living environment.
The size of China
The fact that China has over half its 1.34 billion people in over 1,000 districts, 664 county or higher level cities, the majority of which have populations of 500,000 or more, spread out over four national level municipalities, 22 provinces and five autonomous regions, not including Hong Kong, Macau and Taiwan, is in itself a bit overwhelming. It is hard to grasp the enormity of the human and physical geography of China, let alone the cultural and linguistic differences.
To put it in perspective, if you took the world’s 1,000 largest cities, China would have roughly one third of them (325). While most people would recognize the names of most of the world capital, trade and financial cities on the list, few would recognize more than a handful of the Chinese cities.
To do business in China today, you have to know where and how to locate your business or factory, which means you need to know the cities, districts, towns, streets, villages, areas and special economic development zones, their natural and developed advantages, goals and capabilities.
I will soon publish the “China Cities Blue Book Series,” which will serve as an economic tourist guide that will introduce businesses to China’s major county level cities and municipal districts. The goal is to connect the second economic wave to China’s opportunities in ways which are mutually beneficial to all.