Why Going West Makes More Sense Now.

Wednesday, February 8, 2012 3:37
Posted in category China's Other Cities

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.

If you build it and they will come.

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6 Responses to “Why Going West Makes More Sense Now.”

  1. Nick Mackie says:

    February 8th, 2012 at 4:53 am

    While Go West 2.0 has clear attractions – and local inward investment folk are milking the “operational costs here are so much cheaper than by the coast” line for all its worth – another development is also interesting.
    Close to the Pearl and Yangtze River Deltas, new development zones are springing up not too far away from the established centres. These places offer similar operational costs (at least today) compared with Go West cities plus they are closer to established supply chains and logistics hubs.
    Inter-city competition has been hot for years – it’s getting hotter.

  2. Rich says:

    February 8th, 2012 at 5:04 am

    Nick.

    Long time and thanks for the insights. A lot of moving pieces in the picture.

    R

  3. Chris Devonshire-Ellis says:

    February 9th, 2012 at 6:45 pm

    Hmm. I’m not entirely sure about the definition of “Go West” in this piece – it seems more about the Chengdu / Chongqing issue whereas the Go West campaign covers Xinjiang, Gansu, Qinghai, Ningxia as well as Sichuan. Being widely diverse areas of China, what works in Chongqing isn’t going to work in Urumqi for example.

  4. Rich says:

    February 10th, 2012 at 7:26 am

    Chris.

    Very true, but Chengdu/ Chongqing are the hub for Go West 2.0, and many firms (and embassies) start there before moving out to other markets.

    With regard to the provinces you mention, it would be interesting to see what their lasting power will be… and whether or not they will ever see the same level of interest as Chengdu, Chongqing, or Kunming.

    R

  5. Etienne says:

    February 11th, 2012 at 4:13 am

    The situation as changed a lot indeed since the early days of Go to the West.

    At the same time, I also think like Nick that there are many opportunities in cities closer to the coast that provide a combination of lower costs and welcoming government but do not require companies to go “deep” on China. It may not be cheap enough for industries with low skill labor and very labor intensive work. But as soon as there is some added value or skill, it seems that locations such as Nantong, Taicang, Jiaxing, Wujiang, maybe places like Hefei and other locations along the main train lines from Shanghai/Nanjing can provide decent alternatives to the traditional Shanghai-Kunshan-Suzhou areas.

    Another important point, particularly for new entrants, is that doing business in any of these locations is more difficult than what regions like Shanghai have become, even for Chinese. Over the last few months, I have heard several times Chinese professionals telling me the same story. A few years ago, some experienced Chinese have moved from Shanghai to go to cheaper cities hoping to enjoy better living standards (especially larger housing) as well as some good professional advantages. Some were attracted by large local companies and some just went back to their home town to develop something and catch opportunities. The story I now hear is that quite a few are coming back because they realized that business there is really based on relationship and who you know more than on the strength of what you do.

    I am not sure this is really a trend, but I though this interesting.

  6. Chris Devonshire-Ellis says:

    February 11th, 2012 at 10:26 pm

    Well; you’re correct in that Qinghai and Gansu may ber a road too far for many – except the provincial capitals – but Xinjiang is booming. However the demographics and logistical sensitivities are completely different – as I explained in a recent piece here titled “The Man From Ashgabat” http://www.china-briefing.com/news/2011/11/24/the-man-from-ashgabat-xinjiangs-key-to-central-asia.html which sheds I hope some light on the issue. It may be worth a read…