china’s regional cities business guide 2013 › netc.cbbc › cbbc › bf ›...

In partnership with

China’s Regional Cities Business Guide 2013


Following UK Trade & Investment’s 2008 report on opportunities for UK businesses in China’s second-tier cities, produced in collaboration with the China-Britain Business Council and the University of Leeds, this report takes an in-depth look at lessons learned from UK companies which have successfully established businesses in the regional cities of China.

Report authors: Conor McDonald, Peter Buckley, Adam Cross and Hinrich Voss, Centre for International Business, University of Leeds (CIBUL), in collaboration with CBBC

Executive summary

Introduction

1. Why do British firms locate business operations in China’s regional cities?

1.1 Push factors 5

1.2 Pull factors 7

2. What are the challenges of establishing and operating a business in a Chinese regional city?

2.1 Start-up difficulties 9

2.2 Lack of well-educated and skilled labour 10

2.3 Informal business practices 11

2.4 Local government protectionism 12

3. What strategies should be used to operate successfully in China’s regional cities?

3.1 Listening to, and negotiating with, local governments 13

3.2 Make friends – relationship building and guanxi 13

3.3 Localise your business practices 14

3.4 City cluster strategies 14

3.5 Establish ‘legitimacy’ for your business operations 15

3.6 Invest in employee training now and for the future 15

3.7 Promote your firm-specific advantages 16

4. Some key lessons

5. Conclusion

Appendix 1: Case Companies 21

Appendix 2: Summary of Micro-Strategies 22

Appendix 3: Further information about Case Companies and interviewees 24

Contents

China’s Regional Cities Business Guide 2013 3China’s Regional Cities Business Guide 20132

17

1

32

5

97

3

3119

29

34

22

25

24

1335

826

33

1827

12 14 430

15

28

201610

23

6

21

2

11

• Our research findings indicate that foreign investment in Chinese regional cities is strongly influenced by opportunities to lower costs, tap market potential and benefit from stronger government incentives and support, when compared to the motivations for investing in the traditional investment ‘hotspots’ and ‘first-tier’ cities, found in the coastal regions of China.

• Furthermore, some UK businesses interviewed in China’s first-tier cities were either in the process of making new investments in, or were considering relocating some of their operations to, a regional city shortly.

• However, the research also identified several challenges specific to regional city locations, most notably difficulties during the set-up process, shortages of highly-educated and skilled labour, the prevalence of informal business practices, and cases of local government protectionism. Our findings also indicate that the severity of these challenges varies significantly between the interior and coastal regions of China.

• Despite these challenges, all of the businesses we spoke with about their decision to locate in a regional city of China were satisfied with their decision to do so. The general consensus is that the opportunities and advantages associated with these cities vastly outweigh the challenges of doing business there.

• We identify seven micro-strategies that UK businesses in regional cities use to adapt to local operating conditions. These are: negotiating with local governments prior to entry; ‘making friends’ and building relationships; localising business practices; operating within ‘city-clusters’; establishing ‘legitimacy’; investing in employee training and development; and promoting competitive advantages, such as technology, knowledge and experience.

• We conclude that the increasingly competitive nature of the Chinese economy, coupled with rising operational costs and market saturation (especially in the coastal regions), makes it increasingly important that UK firms explore opportunities outside of the first-tier cities and those traditional investment ‘hotspots’ for foreign firms.

Executive summary

Based on 45 in-depth interviews with both businesses and relevant stakeholders (including Chinese foreign investment agencies and lawyers), this report examines three issues:

• What are the factors that encourage UK firms to locate their business operations in China’s regional cities?

• What are the challenges of conducting business in Chinese regional city locations?

• What are the strategies for successfully operating in China’s regional cities?

Regional City Province

1 Baotou Inner Mongolia

2 Changchun Jilin

3 Changsha Hunan

4 Changzhou Jiangsu

5 Chengdu Sichuan

6 Dalian Liaoning

7 Dongguan Guangdong

8 Dongying Shandong

9 Foshan Guangdong

10 Hangzhou Zhejiang

11 Harbin Heilongjiang

12 Hefei Anhui

13 Jinan Shandong

14 Nanjing Jiangsu

15 Nantong Jiangsu

16 Ningbo Zhejiang

17 Ordos Inner Mongolia

Regional City Province

18 Qingdao Shandong

19 Quanzhou Fujian

20 Shaoxing Zhejiang

21 Shenyang Liaoning

22 Shijiazhuang Hebei

23 Suzhou Jiangsu

24 Tangshan Hebei

25 Tianjin Tianjin

26 Weifang Shandong

27 Weihai Shandong

28 Wenzhou Zhejiang

29 Wuhan Hubei

30 Wuxi Jiangsu

31 Xiamen Fujian

32 Xi’an Sha’anxi

33 Yantai Shandong

34 Zhengzhou Henan

35 Zibo Shandong

China Regional Cities


Introduction

In 2008, the China-Britain Business Council (CBBC) and the Centre for International Business at the University of Leeds (CIBUL), produced for and on behalf of UK Trade & Investment a report which explored the ‘Opportunities for UK Businesses in China’s Regional Cities’.

This report identified 35 ‘regional cities’ in China beyond the major economic conurbations and first-tier cities of Shanghai, Beijing, Guangzhou and Shenzhen. These regional cities all exhibited promising location advantages, particularly in relation to rapid economic growth, low input costs, large and developing consumer and industrial markets, as well as strong local government support backed by regional development initiatives.

Following the success of the original Chinese regional cities report, demand has been growing from UK companies for more in-depth information and knowledge drawn directly from the experiences of other British companies that have expanded their activities into these locations.

In this report we present the findings drawn from an extensive round of face-to-face interviews conducted by the University of Leeds with UK businesses and other relevant stakeholders (including Chinese investment promotion agencies and domestic & foreign law firms in China) from May to August 2012. In total, 45 in-depth interviews took place, 35 of which were with representatives from UK businesses that have established business operations in China. Anonymous case studies are presented in Appendix 1.

The companies we interviewed were located in a range of regional cities in the south-east, south-west, inland and Bohai (area surrounding the Bohai Sea in north east China) regions of China. For comparative purposes UK firms with operations in China’s first-tier cities were also interviewed. The research sought answers to three timely questions:

• What are the factors that encourage UK firms to locate their business operations in China’s regional cities?

• What are the challenges of conducting business in Chinese regional city locations?

• What strategies should be used to operate successfully in China’s regional cities?

British firms are establishing business operations in China’s regional cities for both reactive and proactive reasons. Companies are reacting to a range of push factors which are reducing the attractiveness of locations in the more economically advanced parts of China, and are also proactively responding to a set of pull factors that are serving to strengthen the attractiveness of China’s regional cities relative to these alternative locations.

1.1 Push factors

Although several push factors were identified by managers in China, two were given particular emphasis. Firstly, those firms with operations in the regional cities regarded labour and other factor input costs as being too high in China’s first-tier cities to justify further substantial investments there. For example, Case Company 20 had considered establishing operations in Shanghai before deciding on Xi’an. A company representative commented that:

“We found the salary costs in Shanghai just ridiculous; an experienced engineer’s salary is literally the same as it is in the UK, whereas in Xi’an there is a huge difference in price.” (Operations Manager, Case Company 20)

Similarly, Case Company 7 established a component manufacturing facility in Chengdu after previously considering investing in either Tianjin or Suzhou. The interviewee stated that:

“Chengdu is still a lot cheaper than Suzhou, probably still 30-40% cheaper and also, we figured that if we were going to move to what was called at the time a ‘low-cost economy’ we might as well move to a low cost part of China. So, rather than just moving into China, why not go to a part that is low cost?” (Chairman, Case Company 7)

These two examples highlight the point that cities in the western and inland regions of China have considerable cost advantages over both first-tier cities and those located in the more economically developed eastern regions of China. However, other firms wishing to be close to the economic vibrancy of a first-tier city such as Shanghai without incurring the considerable cost premiums associated with one, reported that clusters of cities on the periphery of major conurbations were viable business destinations. For example, Case Company 3 justified choosing Kunshan with the following statement:

“Kunshan is convenient because it is close to Shanghai, but it is not Shanghai, so we don’t have the labour, electricity and land costs. The overall operating costs are just higher in Shanghai and you don’t need to be in Shanghai to do business there. We are close enough.” (General Manager, Case Company 3)

In this report we consider, not only the advantages of China’s regional cities as business locations, but also some drawbacks. We also make recommendations for how UK companies that are already established in China or that are considering an investment in the near future, can best take advantage of these opportunities to further the growth of their business in China.

1Why do British firms locate business operations in China’s regional cities?


Indeed, in the 2011 update of the regional cities report, we identified a number of city clusters which were peripheral to some of the major first-tier cities. All of China’s leading cities are surrounded by clusters of smaller cities where operating costs are significantly lower and yet where economic spill-overs from their larger neighbours generate substantial benefits, not least because of the creation of high-speed rail links and other transportation infrastructure improvements between them. As one manager commented:

“Manufacturing costs in Shanghai are phenomenal; that is why HP, IBM, Sony and ourselves don’t have a manufacturing base in Shanghai, but we have a manufacturing base in Hangzhou. You have probably heard about the high-speed railway; it used to be around three hours from Hangzhou to Shanghai and now it is less than one hour. It means the sub-city has more potential and it works better for a manufacturer like us.” (International Operations Manager, Case Company 2)

Competition levels in first-tier cities also act as a push factor. Traditionally, Shanghai, Beijing, Guangzhou and Shenzhen have attracted the vast bulk of inward foreign investment, but as their markets have become well established so too has the competition. A manager of Case Company 29, an education service provider headquartered in Wuhan and with branch offices in Changsha and Changzhou, stated that competition levels in the more developed cities played a major role in their location decision:

“We are not investing in the first-tier cities because the competition there is really intense. It is just not wise for us to go to them. So, we go to second-tier cities because we and our advantages will be more obvious since we are more professional than local organisations. This makes it is easier for us to take a percentage of the market.” (General Manager, Case Company 29)

This quote also reveals that the competitive advantages of investing firms can be more pronounced in a regional city relative to local rivals. In many ways, the strategy of Case Company 29 to expand into rapidly growing second-tier cities has arguably fuelled its business expansion much faster than could have been achieved in the more competitive operating environments of China’s first-tier cities. However, this is not always the case. In particular, some companies, especially those operating in niche technology-intensive sectors, find that first-tier cities continue to offer conducive business conditions and market prospects relative to regional ones, as the following quote reveals:

“Shanghai has the benefit of being an international city. Three of China’s six commodity exchanges are in Shanghai, so it really is the centre for commerce, it’s growing, it’s very exciting.” (CEO, Case Company 26)

Indeed, a manager from Case Company 13 reported some mild regret about the decision to locate their first investment in China in the regional city of Suzhou;

“Suzhou probably wasn’t a good place for our type of business, mainly because when we came in we were introducing a concept that was unfamiliar to most of the Chinese healthcare system. It probably would have been better to do our first one, even if it was kind of a loss leader, in Beijing or Shanghai, basically in one of the top-tier cities. This would have created some influence and brand, and for that reason we are basically going into projects in Beijing and Shanghai with high profile partners.” (General Manager, Case Company 13)

The same interviewee was very optimistic however, about the opportunities in regional cities. Indeed, the company has successfully grown their business in Suzhou. Furthermore, at the time of the interview the firm was investigating future investment opportunities in Chengdu and Chongqing.

1.2 Pull factors

The increasing propensity for British businesses to locate in regional cities is not only a product of push factors elsewhere in China. For a number of reasons, regional cities are also attractive business destinations in their own right.

Firstly, market development and the pace of growth in many of China’s regional cities is now exceeding those of the more economically advanced first-tier cities. These growth dynamics are creating new opportunities for foreign firms across a range of business sectors. Furthermore, rising levels of disposable income in many of the more developed regional cities are providing opportunities for foreign retailers and luxury brands. To illustrate, the largest retailer of BMW cars in China is now located in Chengdu.

Secondly, many of China’s second-tier cities, particularly those in western and south-western regions, are supported by central government initiatives designed to redress economic disparities between coastal and interior regions. For example in 2000, the ‘Western Development Initiative’ (or ‘Go West’ policy) was launched by the Chinese authorities with the purpose of attracting foreign and domestic enterprises to underdeveloped provinces in western China. In 2004 this was followed by the ‘Rise of Central China’ campaign which sought to promote investment in the central provinces. Under both schemes preferential policies, incentives, and other special treatments are available to firms which move to the targeted provinces. In general, managers interviewed found these development initiatives to be of value in their location decisions:

Interviewer: ”At the end of the day, what did the choice between Suzhou and Chengdu come down to?”

Interviewee: ”It is very difficult to say, was it one or two things? It was just overall, over a period of time, we [senior management] just felt that Chengdu was the place to be. Although, I would say the biggest driver was probably the government grants that were available.” (Chairman, Case Company 7)

However, there is evidence that foreign businesses in those coastal regional cities which are not subject to special incentives receive favourable local government support, especially relative to first-tier cities. A manager from Case Company 13 shared the following anecdote about the company’s experiences of meeting with local government officials during the final stages of deciding between Shanghai and Suzhou;

“We went to Shanghai to have a look around and basically they told us that, ‘unless you are going to invest 100 million USD, it is not really attractive for us.’” (General Manager, Case Company 13)

In contrast, the local government in neighbouring city, Suzhou, were much more supportive, offering to provide both set-up assistance and introductions to key people in its industry. This ultimately persuaded the firm to establish operations in Suzhou. Indeed, the managers we interviewed were generally of the view that regional city government officials were more welcoming and prepared to offer ‘qualitative’ support, as well as preferential treatment such as tax breaks, reduced rent and accelerated investment approval than their counterparts in China’s first-tier cities.

1


Thirdly, arguably the biggest attraction of regional relative to first-tier cities is the cost structure. Broadly speaking, the cost base (particularly concerning labour and land costs) in the regional cities is much lower than it is in the first-tier cities – especially in the western and inland provinces. However, the cost of labour is gradually increasing across all of China though from a much lower base in the regional cities. The cost-efficiencies associated with regional cities have clear implications for businesses, especially those in labour-intensive business activities. Indeed, Case Company 9 is in the process of establishing a manufacturing facility in Hubei province due to the ‘excessive’ costs of manufacturing in its present location of Guangzhou. The intention is to gradually shift more of its non-export production to this new facility.

We can see therefore, that the attractiveness of China’s regional cities for UK firms is the product of both push and pull factors. As costs in the first-tier cities rise, they are becoming increasingly unattractive as business locations, especially for those firms operating in China for cost-saving reasons. Although costs are rising across China generally, within-country cost differentials mean

that regional cities are becoming increasingly appealing to foreign businesses, especially for those prepared to move to western, central, and south-western provinces, where preferential policies and supportive local governments can often be found. China’s regional cities are becoming especially important for those smaller companies unable or unwilling to compete in first-tier cities, or that lack the bargaining power required to deal with the government authorities there.

Viewed collectively, the companies we interviewed are highly diverse. However, regardless of size, industry (manufacturing or service) or activity (technology-intensive or labour-intensive), our interviewees were generally very satisfied with their decision to establish operations in a Chinese regional city. Nonetheless, a number of challenges in operating away from the first-tier cities of China were identified which are discussed in the following section.

Establishing and operating a business in China can often be fraught with difficulties. However, because many of China’s regional cities are less developed than first-tier cities, there are particular challenges associated with doing business in these locations, as our case studies have revealed.

2.1 Start-up difficulties

Foreign investors new to the Chinese market regularly express frustration at the level of administrative bureaucracy involved in the process of setting-up and establishing their business. Being able to ‘hit the ground running’ was an important consideration for many of those more recent entrants to China keen to secure a foothold in this increasingly competitive market. How local governments could facilitate this was instrumental for many of our interviewees when selecting a regional city to move to. Indeed, for one firm this was the pivotal factor in their location decision:

“Wuxi government assured us that they would provide very good support during the business registration process with a view to getting us up and running as quickly as possible - this was a key thing for us.”(Managing director, Case Company 22)

The majority of interviewees regarded the process of establishing their business in a regional city location to be relatively straightforward. Despite the general perception that the administrative institutions which govern these processes in larger cities like Shanghai are generally more efficient, managers interviewed did not view this as a major obstacle to establishing in a regional city. However, the efficiency of these processes does vary between regional cities, especially when comparing those in the coastal areas of China with those in the central and western provinces.

For example, two firms praised the professionalism and coordination of the Suzhou government stating that local officials provided a helpful ‘one-stop shop’, that eased their investment process considerably. Another manager argued that governments in the coastal cities were more ‘open-minded’ to foreign investment in comparison to those in the interior. Indeed, although firms operating in the central and western provinces were attracted by the preferential policies and investment incentives available to foreign firms the investment process was nevertheless often overly bureaucratic and inefficient, adding to costs:

“From a cost perspective Chengdu is better and this is an advantage. Although there are also disadvantages. Chengdu is in the south west region and government service here is not as professional. The government still see themselves as managers or supervisors instead of a service provider, so you have to spend some time to deal with those situations.” (General Manager, Case Company 17)

Firms with businesses in Chengdu, Wuhan and Chongqing stated that their set-up process was largely unassisted, in stark contrast to the ‘thorough and professional’ support offered by many of the regional city governments in coastal provinces. Clearly, many companies are required to draw on their own resources, capabilities and expertise when setting up operations rather than relying on local government agencies to guide them through the process, especially in those regional cities where officials are less experienced in managing inward foreign investment projects. However, this hands- off approach will be appealing for many potential investors.

1

2 What are the challenges of establishing and operating a business in a Chinese regional city?


2.2 Lack of well-educated and skilled labour

It is well known that labour market issues, and particularly the attraction and retention of highly educated and skilled employees, are becoming increasingly problematic for foreign firms in China. It is not surprising, therefore, that labour market considerations figured strongly in the location decisions of the managers interviewed. Indeed, one manager commented that:

“That is one key point for our business decisions in China, ‘can we get labour?’” (General Manager, Case Company 3).

For many firms, labour resources fall into two categories, namely ‘shop-floor’ workers and ‘talented’ employees, with competition for the latter especially often quite fierce. This is a problem we observed in both regional and first-tier cities, although in the former this is due mainly to shortages of people with the requisite level of education and skills.

Firms often found it difficult to attract ‘talented’ employees, especially for managerial positions in regional cities – even in the more developed cities such as Suzhou;

“It’s also difficult to get talented people to come to work here, we have to find people from Shanghai or Beijing and at times when we talk to some candidates it is a problem for them to be relocated. So although Suzhou is only 100km from Shanghai, we still have issues about getting people to come to work here.” (Human Resource Manager, Case Company 5)

Another firm based in Suzhou noted that;

“I am not sure that it makes a lot of sense to come to a park which is already extremely crowded. We are competing for talent with the likes of Johnson & Johnson who have a massive campus here. They only have 500 people on it now and they are expecting to have 5,000 people in it in five years’ time, so you can imagine the competition for talent that is going on.” (General Manager, Case Company 4)

The experiences of the companies located in regional cities in the Shanghai periphery highlight the point that the more developed regional cities are already beginning to resemble first-tier cities in terms of competition for labour resources. Many of the young talented graduates in these cities have the opportunity to live and work in Shanghai where salaries are higher and job opportunities are more plentiful.

The increasing industrial density of regional cities will continue to put pressure on labour markets and, until the supply of talented employees catches up with demand, this will continue to be a key challenge for firms located in China’s highly developed coastal cities. Several interviews regarded the Chinese education system to be partly responsible, because it produces graduates who are ill-equipped to step into roles which carry significant managerial responsibility.

This challenge however, is not confined to the coastal areas of China. In central and western provinces skilled labour shortages are also significant, with one manager based in Chengdu highlighting this as the most important constraint to business growth:

“…it is much more difficult to find management-level and professional people here, there is just not enough compared to other cities in China, so it is more difficult to find them.” (General Manager, Case Company 7)

Indeed, for some firms – particularly smaller firms - one of the main factors inhibiting them from locating in interior regions was the perceived lack of skilled labour;

“…you know, they talk about going out to the Chengdu area, Sichuan province, Chongqing, you know really cheap, ‘Go West’, but the problem is, labour is not skilled there, so unless you are Intel or the big guys who can afford to train hundreds of thousands of employees in their way of doing business then you can’t go there.” (General Manager, Case Company, 3)

Although clearly anecdotal, this does hint at an underlying perception that many interior cities in China are still too underdeveloped to justify investment. However, it should be noted that many regional cities in central and western provinces, especially the provincial capitals, have several universities which produce thousands of highly educated graduates every year. Part of the problem however, is that many of these graduates choose to migrate and work in the more developed coastal cities. Furthermore, some interviewees felt that this problem has become more pronounced as more ‘big-ticket’ companies relocate their China business operations to these cities to take advantage of lower cost structures:

“Cities like Guangzhou, Shenzhen and Shanghai, have lots of Western companies already, they are full of them, so those companies are moving to the inland cities like Chengdu. We have lots of Western companies setting up factories here. We are increasingly struggling to get people, because there are lots of opportunities, but also lots of competition for getting people.”(General Manager, Case Company 7)

On the other hand, the general view of interviewees was that this situation would improve over the next five to ten years due to the rapid social and economic developments in the smaller cities of China. Furthermore, migrant labour trends in China - which have previously seen large swathes of workers from western and inland provinces relocate to the coastal areas - are already beginning to indicate that migration is waning and more Chinese people are choosing to remain and work in their ‘home’ city. Indeed, this is increasingly supported by provincial and city governments, in contrast with earlier government messages which encouraged local workers to seek employment in China’s more developed coastal cities. Whilst such emergent trends are putting pressure on the attraction and retention of labour in the coastal cities, those in the central and western provinces are benefiting in several ways, not least from the growing pool of labour and consumer numbers. The general impression amongst interviewees was that, while the recruitment of suitably skilled and experienced personnel was sometimes problematic in the regional cities, staff retention was much less of an issue for them, especially when compared to China’s larger cities where competition for labour is more pronounced.

2.3 Informal business practices

The prevalence and significance of informal business practices are well known to anyone familiar with Chinese business culture. It is important, however, to clearly distinguish between informal business customs and norms which typically accompany negotiations and transactions in China on the one hand, and illegal practices such as bribery and corruption on the other. Everyone working for a British company in China needs to be aware that making bribes or facilitation payments is a criminal offence in China and under UK law, a point that was regularly reiterated by almost all our interviewees.

Having said that, our interviews revealed that the more informal aspects of business dealings in China are more commonplace in the regional cities than in first-tier city locations. This was reflected in a heavier reliance placed on ‘guanxi’ networks in the regional cities. Relationship building is an important, if not essential, aspect of conducting business across China but especially in the regional cities. One telling observation by an interviewee based in Wuhan revealed the importance of relationships to foreign businesses here:

Interviewer: “How supportive do you think the local government in Wuhan is to foreign businesses?”

Interviewee: “I have to say, and I am a little bit ashamed to say, yes, they will support foreign businesses, but, it still depends on the relationship you have with them. You have to make sure you have the proper guanxi with the local government. Not too deep, you know what I mean, but at the right level. You can’t become too dependent on them, you have to balance it.”

(General Manager, Case Company 23)

Managers reported that such relationships were often cultivated and maintained through informal events such as dining out with potential customers and local officials.

2


2.4 Local government protectionism

While formal protectionist policies only apply to a small number of industries in China (such as financial services and nuclear energy), some of the managers with operations in a regional city felt that informal local government protectionism could sometimes interfere with their business growth. One firm, a major design practice, with an impressive track record of work in China, established an office in Hubei province in 2007. However, the interviewee commented that “we have found that there are fewer business opportunities here because of localism and protectionist policies”. In one instance this firm was invited to submit a proposal for a major new energy project. Despite winning first prize for their design, the contract was eventually awarded to a local company which subsequently copied the firm’s original design. This raises an important issue about how fairly foreign businesses are treated relative to domestic Chinese firms. Another firm we interviewed in western China had experienced similar problems when bidding for local government projects.

One reason for the prevalence of local protectionist policies is that China’s central government is now pressuring local governments to be more self-sufficient and to use more domestic (rather than foreign) companies and inputs in government-funded projects. Therefore, local government protectionism can be a problem in regional cities. However, on the whole, most interviewees regarded this challenge as manageable. Indeed, two of the firms adversely affected by preferential support of local firms were in the process of significantly expanding their business operations in the same cities, highlighting their optimism for commercial prospects in the future.

Despite the challenges outlined above, all of the firms interviewed recognised the strong potential for their businesses in China. Many have adapted their strategies and business practices to deal with these challenges directly.

The China-Britain Business Council’s (CBBC) website provides a wealth of information and advice for investors new to the challenges of China. In this section however, we focus on those ‘micro-strategies’ used by firms to successfully navigate the particular operating environment offered by a regional city.

3.1 Listening to, and negotiating with, local governments

As we have seen, local governments in China are becoming more selective about the types of business they will incentivise and support. This is especially true of the coastal first-tier cities but it is also evident in the more developed regional cities already popular among foreign investors.

Many of the businesses with whom we spoke stressed the importance of aligning business activities with the interests and objectives of the local government. Those companies that proactively ‘shopped around’, and that met and negotiated with several local governments before making their investment decisions, generally received the greatest government support. This can be an important first step to success in China, particularly in regional cities where local government influence can, in some instances, be stronger than in the more advanced first-tier cities.

Furthermore, listening to local government officials and ‘getting on their good side’ is a good basis on which to build a strong and beneficial relationship with them. Typically, companies which are more technology-intensive or that operate within one of the central government’s

‘encouraged’ industries will have a stronger bargaining position in their negotiations with local governments. Since industrial composition and demand conditions vary considerably across China’s regional cities, we advise companies to contact country experts from CBBC and UKTI to discuss which ones are most likely to be welcoming for their particular line of business before proceeding with an investment project.

3.2 Make friends – relationship building and guanxi

The importance of relationships, connections and networks are rarely underplayed in reference to business operations in China. However for those firms looking to invest or conduct business in a regional city, ‘making friends’ and building relationships are paramount to success. As one interviewee commented:

“Many foreign companies when they first come here and meet with people, they want to start doing business right away, but no, that is not how it works here. First we become friends, and this can take days, weeks or months, but once we make those friendships, then we can start to do business”. (General Manager, Case Company 23)

There are two aspects to business networking in a regional city. One involves building relationships with local government officials and the other with direct business interests, such as customers and suppliers. Arguably, relationships with the local government officials are more important for those businesses intending to establish operations in the city. Futhermore, having good working connections with local officials can often prove useful for handling a range of on-going issues (from taxation to customs) and therefore should be developed and nurtured wherever possible.

2

3What strategies should be used to operate successfully in China’s regional cities?


3.3 Localise your business practices

When operating in China, it is important not only that companies and their managers adapt to the general characteristics of the Chinese business culture, but also that they are aware of the specific nature of the operating environment at the local (city) level, not least because China is a highly heterogeneous country and business conditions vary significantly. Understanding and successfully navigating these differences is a large part of corporate success. General information on Chinese culture and basic courtesies can be found on the CBBC’s website. However, it is important at the outset to stress that China should not be treated as a single, homogenous market. The sheer diversity and make-up of Chinese culture, not to mention socio-economic disparities across and within different provinces, prevent all but the largest foreign businesses from implementing a pan-China strategy.

The most successful businesses in China are those that research the characteristics of the local business environment in which they plan to operate, and which make a concerted effort to adapt their business model and practices to suit the particular conditions of specific locations. Arguably, the importance of ‘acting local’ becomes even more important when operating in a regional city, where the business culture places greater emphasis on informal interactions. One interviewee neatly summed up the importance of respecting and working with the local culture when asked about his greatest challenge when operating in one of China’s regional cities:

“I think it is the recognition of the local culture. One of the biggest challenges I have is trying to get the China company and the UK company working together and, being critical of a lot of westerners, including in our country, they have the attitude of ‘we know best, we know what’s what’. Well it depends on the company. I would not be so arrogant as to come in here and presume that I could tell people what to do. You have to help people to do good things,

you have to get into their culture and work it from the supportive angle, rather than from the control angle. But a lot of companies do it the other way, they go in and they have loads of expats and they just go round telling everybody what to do. For us, that does not develop a business; it just develops a facility that does things for you. It doesn’t develop a business, where you have leaders who want to develop and grow it. So, I think being respectful to the local culture is probably the biggest one if you are coming in here. So my advice would be, get to know it first!” (Chairman, Case Company 7)

In hand with this is the need to foster the development of a strong local management team. Almost all of the companies we spoke to in China stated that this was a key success factor for them. This becomes essential if foreign firms want to create a business in which the local management team takes a personal stake in leading the growth of the business. Furthermore, many of our interviewees stated that one of the best ways to adapt the business practices to the local culture of the city or region was to employ a local manager who possessed a good working knowledge of both cultures (such as a Chinese citizen educated in the UK). This manager can act as a cultural interlocutor, by understanding the needs and objectives of the company whilst respecting local cultural idiosyncrasies and how to work with them.

3.4 City cluster strategies

In a 2011 report we identified twelve city clusters in China which in most cases were geographically contained within single provinces. While the sheer geographical size and heterogeneity of China can often be daunting for foreign businesses, particularly small firms, operating within city clusters affords companies the opportunity to generate scale and scope economies, and to address multiple city markets, without having to establish offices and facilities across the country.

Many of the firms we spoke with used regional cities located in these clusters as hubs from which to target opportunities in neighbouring ones. For example, firms located on the periphery of Shanghai typically sell to, and source supplies from, neighbouring cities, in addition to the business activities in their present location.

3.5 Establish ‘legitimacy’ for your business operations

Many of the companies that conducted business in regional cities engage in practices which could be described as ‘impression management’. Although not using this specific expression, it is clear from the interviews that British firms are engaging in this form of behaviour with the intention of both integrating with, and building legitimacy for, their business with local stakeholders in China. Legitimacy building is the process of establishing favourable opinion amongst constituents and relevant stakeholders in the location where the firm is established.

Examples include firms launching initiatives to help the local community, investing in schools and education, holding ceremonies in honour of local dignitaries (e.g. mayors and high-ranking local officials), conducting special seminars in universities and technical colleges, providing English-language courses for local people and more generally making an effort to engage with events, communities and stakeholders which are beyond their immediate business interests. Initiatives like this are effective means of fostering stronger social and business relationships, improving the reputation and image of the firm and generally raising the profile of the business.

One outcome of taking part in impression management activities is that the company gains more prestige and is more welcomed and respected, despite being non-local. These activities do not have to be extensive, extravagant or expensive. In China, it is generally sufficient for firms to demonstrate the effort to engage and interact with various facets of the wider societal environment in this way.

3.6 Invest in employee training now and for the future

We have already discussed some of the challenges associated with skilled labour shortages which firms often face in China’s regional cities. Some firms have responded by launching proactive initiatives to overcome this by creating their own internal supply of workers trained specifically for their role. In one example, a technology-intensive designer of software chips based in Xi’an has partnered with a British university that has established a campus in China, for the purpose of training engineers with the capabilities required for the company’s specific line of business, as explained by the General Manager:

“In China, if you tell me you are short of people, then it is not a good statement because there is no shortage of people, but there is a shortage of people who are trained for your job. You [have to] create your own academic environment. You just need to approach these things with the right attitude, give people some training. That is really the only long term solution.” (General Manager, Case Company 20)

This company is planning a major expansion in China over the next two years and this internal supply of labour is seen as essential to facilitating their growth ambitions. The interviewee went on to say:

“We are working with them [a UK university] to create a training programme and that way to generate engineers who we can train them to be the kind of engineers that we need, really for cost and resource reasons.”

Another company based in Wuhan, that is currently planning an expansion into educational software, has partnered with a Chinese university to generate a supply of skilled people with the abilities to take this business line forward.

A key lesson from these two cases is that, despite labour shortages in some regional cities, firms who take a proactive approach to addressing these problems can mitigate this challenge themselves. Furthermore, through partnering with educational institutions, these firms are effectively creating a pool of labour which is trained to meet the specifications required for their businesses.

3


More generally, we recommend that firms in China’s regional cities market their business as an attractive proposition for potential employees. Firms should try to demonstrate the benefits of working for them in terms of personal development, salary and associated benefits. Most importantly, firms need to ensure that what they offer is competitive by both local and provincial standards.

3.7 Promote firm-specific advantages

Although an obvious point, marketing the company, educating potential customers, raising the company’s profile and, perhaps most importantly, communicating what its capabilities are, is essential for success in China. This is especially so in China’s regional cities, where localism and conservative attitudes are often more widespread. One interviewee in Wuhan mentioned that local projects and local business are often won by the firms who offer the lowest price and these are usually domestic Chinese companies. To make headway in the market this company has engaged in extensive ‘educational’

seminars and promotional activities with the aim of (in the words of the interviewee), “promoting our advantages, our technology and experience and our reference projects”. The company advertised in trade publications and gave seminars at local universities and other trade events in Wuhan. This had the dual advantage of both promoting their technology and experience and also acting as a recruitment channel.

Other regional city firms also used promotional methods to generate awareness of their unique abilities and skills. This can be summarised as ‘playing to your strengths’, and explaining to potential clients how a company’s products or expertise are superior to those of competitors.

3

China’s Regional Cities Business Guide 2013 17


Talk to as many people as possibleBusinesses that have ‘been there and done it’ are one of the best sources of useful information concerning operating in China. However, it is invaluable when looking to learn about the specific idiosyncrasies of certain regional city locations. As one interviewee stated:

“Talk to as many companies who have done business in China or who are going through the process at the moment. Meet the local government associations who are there, talk to people within your industry and just try to get as much information as you can”(Operations Manager, Case Company 20)

This is perhaps one of the best ways for UK business people to increase their knowledge about operating in China. In other words, in addition to networking with Chinese companies, government officials and potential clients, it is important also to speak with and learn from British and other international firms experienced in operating in China’s regional cities.

Know the local ‘rules of the game’The ‘rules of the game’ encompass both the formal legal rules, policies and regulations and the informal norms and expectations which are characteristic of a particular location. Broadly speaking, having good knowledge of the local business environment and how it works, as well as the local customs and expectations, the legal environment, local norms and values, and more generally how potential customers, suppliers and business partners think and act, are all essential for ‘getting ahead’ in China’s regional cities. However, such information and knowledge are often difficult to obtain in China. Prior to investing in a particular city, managers should invest in research and do sufficient due diligence. It may take time to build up this stock of knowledge, but the effort and resources needed to do so are likely to pay dividends in terms of future success.

Consider the fit between business activities and locationManagers should carefully evaluate alternative locations before making an investment in one of China’s regional cities. Key questions that managers should ask themselves before finalising their location choice include:

• is the business environment conducive to your business activities?

• what is the demand for your products and services?

• do you have any existing customers or suppliers in the city?

• does the local government encourage investments from your type of business?

• how competitive is the market? • who are your competitors? • are any of your existing competitors

already there?

Remain open-minded and flexibleAlthough we have identified a number of micro-strategies for operating in regional cities, we add the caveat that managers will need to remain flexible in these environments and be prepared to adapt to the particular scenarios and challenges that confront a particular business there.

Stay committed and be persistent If managers want their firm to ‘take-off’ in a regional city environment they need to maintain hands-on involvement with the management of the business, especially during the first few months. We have already highlighted the importance of establishing a skilled senior management team in China. However, parent company managers need to remain proactively involved in the management of business operations on the ground. This means that managers need to establish clear lines of communication with their business in China. Many companies interviewed have found it useful to send a senior manager from the UK to lead the development of the business during the first year of establishment, rather than having a more hands-off approach. Furthermore, managers will need to exercise patience and know that while everything will not always go according to plan, most problems can be overcome.

In the words of one interviewee:

“Get stuck in to the CBBC. It is a fantastic organisation, it made our getting into China enormously easier, it puts you in control, and I would suggest that for any small British company, high tech or otherwise, it is the only sensible way to go.” (CEO, Case Company 26)

Engage with the UK’s China trade support networkUK Trade & Investment (UKTI) is the lead government organisation that supports companies in the UK trading internationally.

The China-Britain Business Council (CBBC) is UKTI’s partner for delivering trade services in mainland China.

An extensive partner network available through the British Embassy in Beijing, the British Consulate-Generals in Shanghai, Chongqing, Guangzhou, and Hong Kong, and CBBC’s 13 offices across mainland China, can assist UK companies by providing advice and information on first-tier and regional cities. Trade development services provided and delivered by UKTI and CBBC are structured around providing advice, support, information, and opportunities and may be accessed through the Overseas Market Introduction Service (OMIS).

OMIS is a tailored service which enables UK companies to access market and industry information, identify potential contacts or organise bespoke events. Other UKTI services such as Passport to Export, available to new and inexperienced exporters, and Gateway to Global Growth for experienced exporters, offer further structured support for succeeding overseas. Business opportunities in China may also be emailed directly to your inbox. Companies can sign up for this free service by visiting www.ukti.gov.uk. More information on how to access these services via UKTI’s network of International Trade Advisers is available at: www.ukti.gov.uk/export/howwehelp/internationaltradeadvisors.html

For instant access to expert advice on doing business with China, or simply for an opportunity to talk through your company’s China strategy, CBBC’s China Business Advisers are at hand both in China and in the UK: www.cbbc.org/who_we_are/contact_us/CBA

Based on our interviews, a number of key lessons for doing business in China’s regional cities have emerged.

4Some key lessons


Case Company ID number

Company size (in China)

Company’s location(s)in China (city)

Key Case Company characteristics

1 Large Shenzhen Design and manufacture equipment and devices for education sector

2 Large Tangshan Packaging manufacturer

3 Large Kunshan, Nanjing Packaging manufacturer (Pharmaceuticals)

4 Large Suzhou Design, engineer and manufacture metals

5 Large Shenzhen, Wuxi Manufacture precise counting machines for food processing

6 LargeBeijing, Guangzhou, Shanghai, Shenzhen, Wuhan, Chongqing

Professional services firm specialising in architecture, design and engineering

7 Medium Chengdu Manufacture components for aerospace industry

8 Medium Chengdu Design and manufacture bespoke display cases for museums

9 Medium Guangzhou OEM manufacturer

10 Medium Shenzhen, Dongguan Design and manufacture acoustic control equipment

11 Medium Shenzhen Design, manufacture and sell energy saving equipment

12 Medium Chengdu Design and manufacture advanced measuring equipment

13 Medium Suzhou Design advanced sterilisation equipment

14 Medium Chongqing Manufacture components for automotive industry

15 Medium Tianjin Produce carbonaceous materials

16 Small Wuhan OEM manufacturer for agricultural industry

17 Small Chengdu Design and manufacture advanced measuring and motion control equipment

18 Small Tianjin Semi-conductor engineering

19 Small Chengdu Software developer (Banking and finance)

20 Small Xi’an, Shanghai, Shenzhen Chip designer

21 Small Shanghai, Chengdu Architectural practice

22 Small Wuxi Manufacturer of remote radio equipment

23 Micro Wuhan Provides advanced engineering solutions to the aerospace and energy industries

24 Micro Wuhan Advanced steel production and engineering

25 Micro Nanjing Design and manufacture advanced health and safety solutions for energy industries

26 Micro Shanghai Design and manufacture static elimination equipment

27 Micro Shanghai Design and manufacture spectroscopy equipment for the life sciences

28 Micro Rizhao Software developer (Gaming industry)

29 Micro Wuhan Education services provider

Appendix 1: Case Companies

Earlier research has identified China’s regional cities as attractive locations for the business development and growth of British companies. The wide range of opportunities, across a broad array of industries and business activities, ensure that these opportunities will appeal to the diverse composition of UK industry. With this report we have explored regional city opportunities and challenges in more depth.

For market seeking investors, the pace of growth and development of China’s regional cities affords the opportunity to take advantage of and get engaged in rapidly developing consumer and industrial markets. For those seeking to make cost savings, the cost structure of regional cities is typically much lower relative to first-tier locations and, therefore, still affords firms the opportunity to make cost savings in China – particularly for those willing to move to an inland or western city.

China’s regional cities often present unique challenges to investors who are unaccustomed to doing business in the country. Nevertheless, the general consensus from our research is that their location-specific advantages outweigh potential drawbacks – especially in light of the increasingly

challenging operating conditions now present in first-tier cities. Furthermore, the challenges of operating in a regional city location can be mitigated by adopting various micro-strategies which help firms to accommodate and manage local idiosyncrasies. By making a concerted effort to engage with multiple facets of the local business and cultural environment, firms can re-channel elements of the local context into their growth strategy in order to be successful in China.

It is important, however, that managers thinking of making the move into a regional-city environment maintain an open mind and be prepared to be flexible and adaptive. More and more businesses from the UK and elsewhere are now entering or expanding operations in the regional cities of China. As our research shows, all of the UK businesses we spoke to were satisfied with their decision to establish operations in a regional city location.

When selecting a location in China it is essential that you adequately evaluate how conducive it will be for your business activities and how it fits with your motivations for entering China. The CBBC and UKTI can provide you with a wealth of information on China in order to make the most of the opportunities you will find there.

Useful contacts

UK Trade & Investment www.ukti.gov.uk

British Diplomatic Posts in China www.ukinchina.fco.gov.uk/en/

China-Britain Business Council www.cbbc.org

British Chamber of Commerce in China www.britcham.org

5Conclusion


Micro-strategies Rationale Implementation

Invest in employee training and development

The competition for scarce labour resources is often a key impediment to business growth in China. Some companies have made large investments to ensure that they have access to a sustainable supply of skilled labour and talented employees.

Make partnerships with universities (both foreign and domestic) and technical colleges. Seek to create training programmes which equip people with the skills your business needs.

Invest in ‘on-site’ employee training and development.

Demonstrate to potential employees the skills and abilities they acquire by working for your business, along with any career development potential within the company.

More generally, ensure your wages and other benefits are competitive.

Establish legitimacy Making the effort to engage with multiple stakeholders in the location can help your business to gain more prestige and respect, despite being non-local.

Engage in impression management initiatives.

Interact with local stakeholders in both your business and non-business environments.

Participate in local community events. Demonstrate that your business is proactively interested in and engaged with the location in which you operate.

Promote your firm-specific advantages

In the increasingly competitive operating environment in China, where foreign firms face stiff competition, not only from other foreign firms but also increasingly from domestic Chinese businesses, it is essential that you promote the unique competitive advantages that your firm possesses.

Promote your technology, experience and knowledge.

Demonstrate why your company is superior relative to local competitors and other foreign firms.

Educate your market through advertisements, seminars and other promotional activities.

Appendix 2: Summary of Micro-Strategies

Micro-strategies Rationale Implementation

Negotiate with local government

Establishing good relationships with local officials and local government agencies prior to finalizing your investment can significantly ease the set-up process.

Meeting with multiple local governments can help you to determine where you will likely receive the most support.

Identify which cities are encouraging investment from your type of business or industry.

Set-up meetings with local government officials in these cities. In these meetings emphasise the advantages of your business - i.e. what can you bring to the city? If your business is technology-intensive check beforehand whether or not you are eligible for high-tech status.

‘Shop around’ - try to get the best deal.

Relationship building Relationships and ‘guanxi’ are an integral component of the business culture in China. It is essential that foreign companies are aware of this. Relationships and connections can often be more important in regional cities where business practices are more informal.

Establish connections with local government officials, customers, suppliers and business partners.

Localise your business practices

China is not a homogenous market. It is important to respect local cultural aspects of the region or city in which you locate. Tailoring your business practices to accommodate local culture and institutions can greatly support the development and growth of your business in China.

Learn about the local ‘rules of the game’.

Employ locals in top management positions.

Conduct regular research and analysis on trends and developments.

City-cluster strategies The scale of China can be daunting for many businesses, particularly small and medium sized enterprises. Operating within city clusters affords companies the opportunity to generate scale and scope economies, without having to establish multiple offices or facilities across China.

Identify groups of cities that are in close proximity to each other.

Identify opportunities in these cities and use the city in which you are established as a hub from where to target neighbouring cities.


For the purposes of this study we follow the company size delineations used by the European Commission for Enterprise and Industry (EUEI), which defines three categories of firm. Firms with fewer than 10 employees are ‘micro’, firms with more than 10 but fewer than 50 are described as ‘small’ and firms with more than 50 but fewer than 250 are described as ‘medium-sized’. Therefore, by default firms with more than 250 employees are considered ‘large’.

Using these definitions our sample is composed of six large firms, nine medium-sized firms, seven small firms and seven micro firms. The majority of companies sampled were established as wholly foreign owned enterprises (WFOEs) (25). However, three were representative offices (RO) and one was a joint venture (JV). Two of the three firms that had originally established as ROs were in the process of restructuring their operations as WFOEs.

Appendix 1 shows that the Case Companies have established their business operations in a diverse range of cities in China. Combined, the Case Companies have set up operations in the south-east, south-west, inland, north-west and Bohai (central coast) regions.

Interviews with Case Companies were conducted in both the UK (13) and China (22). All UK-based interviewees had been directly involved in the company’s decision to establish operations in China. In most cases, these managers were still actively engaged in the management and strategy of the firm’s activities there. Except for one, all UK-based interviewees were non-Chinese. In China, almost all of the interviewees held a senior management position and in many instances were directly responsible for setting up the company’s operations in China – or who had joined shortly after the company’s entry. These interviews were conducted with both expatriates (7) and native Chinese managers (15).

Appendix 3: Further information on Case Companies and interviewees

URN 13/1200 - China’s Regional Cities Business Guide 2013

Published October 2013 by UK Trade & Investment

To find out more, scan this code with your smart phone.www.ukti.gov.uk +44 (0)20 7215 5000

UK Trade & Investment is the Government Department that helps UK-based companies succeed in the global economy. We also help overseas companies bring their high-quality investment to the UK’s dynamic economy acknowledged as Europe’s best place from which to succeed in global business.

UK Trade & Investment offers expertise and contacts through its extensive network of specialists in the UK, and in British embassies and other diplomatic offices around the world. We provide companies with the tools they require to be competitive on the world stage.

UK Trade & Investment is responsible for the delivery of the Solutions for Business product “Helping Your Business Grow Internationally.” These “solutions” are available to qualifying businesses, and cover everything from investment and grants through to specialist advice, collaborations and partnerships.

Copyright

© Crown copyright 2013

You may re-use this information (excluding logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit OGL or email [email protected].

Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.

www.ukti.gov.uk/china

Legal disclaimer

Whereas every effort has been made to ensure that the information given in this document is accurate, neither UK Trade & Investment nor its parent Departments (the Department for Business, Innovation and Skills, and the Foreign & Commonwealth Office) accept liability for any errors, omissions or misleading statements, and no warranty is given or responsibility accepted as to the standing if any individual, firm, company or other organisation mentioned.

The paper in this document is made from 50 per cent recycled waste pulp with 50 per cent pulp from well-managed forests. This is a combination of Totally Chlorine Free and Elemental Chlorine Free. The inks are vegetable oil-based and contain resins from plants/trees and the laminate on the cover is sustainable, compostable and can be recycled.

china’s regional cities business guide 2013 › netc.cbbc › cbbc › bf ›...

Documents