China Business

China’s Interior Is Missing Some Parts

Chongqing lawyers

A couple years ago, I attended an incredibly bad China seminar in Seattle at which one of the speakers essentially told everyone they should locate their businesses in Chongqing. His rationale (replete with way too many pictures of him smiling and eating with purported high level government officials) seemed to have been based on the following:

1. Chongqing has a lot of nice people.

2. Chongqing really wants foreign investment.

3. China really wants foreign investment in Chongqing.

4. Sichuan food is really cheap and good.

5. Look at all these pictures with me smiling.

6. Ford is there.

Now other than number 4, I do not see how any of this relates much to the average business looking to go into China and so I decided I would press this speaker a bit regarding why he sees Chongqing is a paradise for foreign companies:

Q: Are there any English speaking accountants or lawyers in Chongqing who have even the most basic knowledge of what it takes to represent an international company?
A: Yes.

Q: Can I get their names from you later?
A: I don’t have them but they have to be there because Ford is there.

Q: Are these international lawyers? I mean, are they capable of representing foreign companies in China?
A. They must be. Ford is there.

Q: I can understand how Chongqing can make sense for Ford (who presumably got all kinds of big time benefits for locating there) and can bring in its own people to do just about everything, but is there really infrastructure in place there to handle a 200 employee manufacturing business?
A: Yes. If there is enough infrastructure in place for Ford….

Q: What about enforcement of intellectual property rights and the overall legal system in Chongqing?  How does it, let’s say, compare with Shanghai and do you think it relevant for foreign companies to consider this?
A: Well I am sure Ford considered this when it chose to go to Chongqing.

I admit I am embellishing here and I don’t really remember the full sequence of my questions and the speaker’s answers, but you get the drift.

Eurobiz Magazine has an recent article entitled, Parts missing:

China’s interior still requires systems upgrades for it to become viable for international companies
[link no longer exists] that treats the issue of China’s interior (mostly Chongqing) far more sensibly and with far more nuance.

The article starts by describing Chongqing “as having 21st-century hardware and 19th-century software and stating that “Western companies all know central and northeast China hold great promise as colossal consumer bases, as well as possible refuges from the increasing costs of doing business along the coast.” Nonetheless, even though Beijing is “ploughing billions of euros into developing the infrastructure of provinces like Chongqing, Tianjin and Anhui – and connecting remote locations through rail and roadway arteries – the interior is still a long way from becoming a viable, wholesale investment target for any but the largest Western companies.”
I agree and this article explains why:

Great hidden costs lie in store for potential investors, like government corruption, changeable policies, inflated costs of production inputs, a lack of skilled labour and experienced management, as well as reasonable salary levels for local hires.

The article then talks about a person named John who is building a factory in Chongqing for an American company and how his “greatest challenge” has been “resource constraints:”

“Components and parts for machines and facilities have been difficult to come by out here,” John said. He conjectured, “Ford must have all their parts imported, because I can’t find what I need here.”

And then there is the problem of finding the right people:

Another constraint was supervisory: “If you consider it took me four times the resources I had planned to build my Kunshan operation; it is taking me 10 times more in Chongqing. There just aren’t very many engineering supervisors, construction supervisors, safety inspectors and the like out here that know what quality work is and can watch over construction and engineering teams that know even less.”

Hiring qualified staff has been another of John’s investment demons: “All of my staff are either locals who already live here or who wanted to return home. They’re young, in their twenties, early thirties, with little experience. I have no intention of staying on past my three-year contract, so I have to find a replacement now; a local, trustworthy, with experience, someone I can train. It’s not going to be easy.”
Even junior-level positions can be difficult to fill in China’s hinterland.

Another friend, Robert, told me recently that an Australian avionics-parts plant he was in charge of establishing between Beijing and Tianjin, in a county-level district, had a difficult time even hiring an experienced, bilingual secretary into the area. “We received a lot of calls from people in Tianjin and Beijing, but when they found out where the plant was they were no longer interested in the position. … In the end we had to pay a young lady twice what she was being paid in Beijing to hire her, supply her with a rent-free apartment in the nearest thing to an expat compound here, and provide her with a ride wherever she needed to get in the area. Hiring engineers was the same: we had to double their salaries, provide nice housing and drive them around. They all essentially had expat-style packages, though they were Chinese!”

I am certainly not saying Chongqing is wrong for every company looking to do business in China (we recently helped an IT client get set up there and they are doing just fine), but I am saying that investors should approach their potential investment locations with deep, up-front investigation and analysis of hidden costs.

5 responses to “China’s Interior Is Missing Some Parts”

  1. If you need really top-of-the-line people, you really won’t find them in Chongqing, or many of the other interior cities. If you have lived in CBD in Beijing, or in Shanghai, why would you want to live anywhere else in China; it just doesn’t make sense?
    I have talked more about how Shanghai and Beijing continue to draw the best human talent away from the interior:
    http://www.chinavortex.com/2008/03/chinas-biggest-challenge-for-developing-the-west/

  2. Very good and sound advice. And when you consider that Chongqing is one of the four municipalities directly under the Center, it makes one understand what someone is up against trying to do business in the hinterland where many of the government officials – and if you are talking about business, and just about anything else, you are talking about government officials – are hardly in-synch with the Center. Many of those who are able do their best to leave the much less developed cities in order to take advantage of the opportunities found in the bigger eastern cities, especially Beijing and Shanghai. It is not coincidental that Beijing’s population has swelled to 18 million. Not all of them are construction workers.

  3. Shanghai’s original glory in the 20’s and 30’s was a result of this migration of top talents and the resulting melting pot led creativity and freedom from old rules. I quite honestly much prefer to hire “wai di” people in Beijing to those who are native to this city with all their social and family obligations. I have also had a fair amount of experience with recruiting people for 2nd tier cities (recruit laterally 2nd tier to 2nd tier is the strategy here, and preferably not from the same province – strong local prejudices in play!). One major draw about BJ and SH is children’s education as High School students from these cities have much better top college prospects than from elsewhere in China, and this is one area that has to be addressed in terms of talent retention/attraction in places like Chongqing.
    Having said all that, I have also noticed the slow trickle of professionals from Shanghai and Beijing back to home cities, to be closer to aging parents, to have a more relaxed pace of life etc.(Chengdu argument), and I do believe that this reverse trend will accelerate in time. This brain gain phenomena also applies to the increasing number of inquiries I get from Chinese professionals overseas who are in their 40’s and 50’s and have aging parents to take care off.
    The reverse migration will happen at some point when there is sufficient mass of professional opportunities supported by improved local soft infrastructure, but it will take time (China time.. so let’s say 5-7 years??)

  4. Was it a server error or you actually blocked my comment calling, fairly, “They all essentially had expat-style packages, though they were Chinese!” racist? It is racist, right? discriminating people on the basis not of capabilities, but of race. And that exclamation mark! uhhh.
    Since I can’t quit reading your blog or reading in the knowledge that you can’t tolerate a reasonable comment like that, I hope you’d assure me it WAS a server blip.

  5. Having been addicted to your blog for a while now(“blog” seems such a cheap word for such a treasure chest of advice) I note your consistency of message “up-front investigation and analysis.”
    This is true of anything and everything you do in China be it entering into a JV, WFOE, Relocation and most definitely when it comes to hiring staff!

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