Why Going West Makes More Sense Now.Wednesday, February 8, 2012 3:37
While it has been a while since I have posted anything on China’s interior, I was asked a couple of weeks ago to comment on a recent initiative between Chengdu and Chongqing to develop a new zone … together. Historically cities that were in competition for different investments, and cities whose own markets had not yet developed for many, Go West 2.0 has over the last few years really driven these cities forward.
Of the 10 or so questions, I felt the following three would be of the most interest to readers. Particularly those readers who were unfamiliar with Chengdu and Chongqing. I am simply copying/ pasting in the questions (and my responses), so if you would like to follow up on any of them with your own questions, please do so in the comments section.
In your opinion, what (briefly) are the major advantages today for firms (both Chinese and Western) looking to relocate or establish operations in the Sichuan / Chongqing area over China’s eastern coastal areas and/or Guangdong? What are the drawbacks?
In the past, 8-10 years ago, Western China was a place for firms to find cheap sourcing of manufacturing. Labor costs, fixed investment costs, and raw materials were all available at a discount from China’s East Coast. Additionally, depending on the city in which a firm was looking to invest, these cities could provide access to specific talent that may have been unavailable on the East Coast. Chengdu is known for electronics, software developers, and some aerospace, Chongqing is known more for its heavy industries and steel capacity.
Over the last 5 years, as these economies developed, they have become strong markets for products as well. So, whereas it was only a manufacturing story 10 years ago, now firms can manufacture for the specific market, which is creating interesting opportunities for firms who understand the differences in consumers and are able to create SW China specific products that are available for 100 million instead of simply manufacturing for export. Long term, it is a much more sustainable business model, and that is why the SW market is becoming more attractive.
“What’s interesting is that the “Go West 1.0 campaign” was a dismal failure, but it looks like “Go West 2.0” is going to be different because the companies that are going west are different.”
Related to #2, the biggest change is the regional market. However, Go West 1 was largely a failure because, at the time, China’s market was still 95% export dominated and the costs of manufacturing on the East Coast had not risen. It was too soon. So, firms only looked to SW China for either a specific manufacturing need/ capability (Ford), or if they were within the highest volume FMCG products (Coke and Yum).
Separately, another reason for GW1.0 failing was that the infrastructure was not in place to support massive amounts of inbound investments to these markets. Firms who needed large amounts of energy, resources, etc could find themselves up against quotes and without stable (guaranteed supplies), firms were not going to be comfortable investing.
As local economies develop and populations increase, urban planning in cities like Chengdu and Chongqing will become increasingly important, both to handle growth and to (hopefully) improve the quality of life for residents. Do you feel that both cities have adequate plans for growth in place? What are the major challenges here?
These cities have been developing at a very rapid pace for the last 5-7 years, and they have been doing so with a 2020 plan in mind. In short, both cities know their populations are going to explode, and they are building now to meet future capacity.
Challenges are much the same as other cities in China, but in this market the environment itself is going to be a big challenge. Chengdu and Chongqing are naturally nice cities, but in the last few years there has been a decrease in air quality that impacts the quality of life that both cities advertise.