City Report: Xi’an

Wednesday, January 17, 2007 2:48

Perhaps most famous for the Terra Cotta Warriors that guard the tomb of the first emperor of the Qin Dynasty, Xian is the capital of Shaanxi Province.

Located between Beijing and Chengdu in the north/ central part of China, Xian had historically been considered the “Gateway to the West” for multinationals looking to open the western front. That was before Chengdu became the anchor to the West.

Due to aged infrastructure, being inaccessible to sea ports, and a small pool of qualified managers, Xi’ an’s manufacturing base remained largely Chinese. Unlike Chengdu, which took a policy of “build it and they will come”, Xian did not overdevelop and then work off a base of oversupply. Instead it let growth and investment lead development activities, and while these numbers have been increasing the last five years, their transformation was visibly slower than other second tier cities.

As multinational and Chinese firms grew their regional operations to national, and as the development of the western cities of Chengdu and Chongqing began, Xi’an indirectly benefited from the “Go West” policy as manufacturing operations required raw materials from the area, and that need required the center of the country to improve its logistics capabilities.

Economic Overview:
Located in the center of China, Xian is a converging point of highways, railroads, air routes and communication cables that offers access to the vast market in the inland of China.

The city has improved its infrastructure over the past decades by building roads, a stable power supply (7.18 billion kilowatt-hours), water supply (1.4 million tons), and telephone lines (1.45 million lines). A 150,000-kilovolt thermal power plant is currently under construction in the western suburb with the promotion of clean fuels such as natural gas, the city is making progress in environmental protection.

From a macroeconomic perspective, Figure 1 shows that Xian’s GDP has more than doubled since 2000 in at a stable percentage rate of 8-10% each year, and expected to continue for years to come.

As Xi’an has growth, residents have seen their savings nearly triple, disposable income has increased 50%, and as a result they have begun to spend more money. These trends have led to increased consumer and real estate spending, and in general a higher living standard has attracted retail companies like Nike, Carrefour, and LV to all establish a presence in Xi’an.

Xian economicTo guarantee Xi’an’s importance, the Shaanxi Provincial Government implemented the “One-Line and Two-Belt” policy, an industrial economic system in which Xian is the center and the Shaanxi section of the Longhai Railway and Baojing-Tongchuan Freeway are two axis.

The system features high-tech development zones and advanced technology zones in a network where Xian is the center with the five smaller cities Baoji, Yanglin, Xianyang, Weinan and Tongchuan surrounding it. With this system, Xian will attempt to create an economy that grows in a co-dependent way by leveraging the growth of other cities and attract more international investment.

According to interviews conducted with park and government officials, Xi’an has over 700 scientific research institutions and 40 universities in Xi’an and surrounding districts. The proportion of technical personnel in Xian is the highest in China, Xi’an has become a leader in aeronautics, aerospace software, and other high value industries.

To continue its growth, the Government has highlighted the following areas where investment is encouraged:

  1. High-tech concerning electronic information, biotechnology, optical, and aviation
  2. Industry reformation of textile, equipment manufacturing, chemicals, food and beverage and building materials
  3. Tourist industry and facilities
  4. Professional services
  5. Infrastructure
  6. Real estate

Foreign Presence:
The FDI coming into Xian has been growing at a phenomenal pace since 2000 (see figure below) whereby contracted FDI has grown from under 600 million USD to nearly 1.4 billion USD.

Like other second tier cities, the number of contracts has remained steady while gross investment has increased, thus the size of the investments has grown significantly. This trend is a sign of the success of Xi’ an’s to retain and attract new investors as many multinational companies move away from joint venture arrangements to high value wholly owned manufacturing facilities.

Companies like ABB, Rolls Royce, and IBM have all invested large sums of money into Xi’An as restrictions within their industries are lifted through WTO commitments.

Xian FDI

By the end of 2004, fifty-eight countries and regions had established about 2,560 enterprises in Xian. Nineteen of the Fortune 500 enterprises (including ABB of Sweden; Mitsubishi, Toshiba and Fujitsu of Japan; Coco-Cola and Boeing of the United States) had established 21 companies, and most recently Applied Materials announced that it will invest in a global R&D software center in Xian.

Wrap Up:
This transformation of Xi’ an’s is partially due to the development of the western Chinese cities, and as one of two logistics hubs in the heart of China, Xi’ an’s stands to benefit greatly as these economies continue to grow.

In additional to building the capabilities and network for heavy industry, Xi’ an’s has also developed strong capabilities in aerospace and software, and as investment in this area continues to train Xi’ an’s residents other companies will follow when searching for experienced technical staff in in a low cost market.

Xian is a city that is still in the early stages when compared to Beijing and Shanghai, but it is transforming from an isolated regional city into a key regional player in the growth of China’s national market. Once known only for the Terracotta warriors, Xian is now becoming one of China’s leading second tier cities, and multinationals should begin considering Xi’ an’s as a potential site for future manufacturing and real estate investment.

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