Excellent article by David Dayton entitled, China prices: Moving not necessarily a solution to rising prices [link no longer exits]. The article sets the key things (beyond labor and real estate costs) to look at in determining where to locate your business.
Here are Dayton’s top five:
1. Confirm that needed industrial services are on hand.
Assuming you have already found the primary factory with which your company is going to be working, you need to scout the local support and secondary factories (sub-assemblies, components, packaging). Just because big first-movers are in a city you like doesn’t mean all the resources you need are there yet.
2. Ensure a good selection of educated employees.
Smart people gravitate toward opportunities, and the majority of opportunities are still on China’s east coast. The standard of living is better, the facilities are better, most international companies have a presence there and so there are more jobs there. The educated in China are still mostly centered in the large cities of Beijing, Shanghai and Guangdong province. You’re not going to find as many well-educated and experienced job applicants in China’s second-tier cities.
3. Determine how wired you will be.
Communications infrastructure, specifically Internet access and other physical services, is not always up to speed — literally. Don’t be misled by the fact that the hotel in which you are staying has relatively good internet access. Not all office buildings or industrial zones (or individual factories) have the same physical wiring. And domestic providers are not held to the same standards as international hotels. Further, just because the local office of China Telecom ADSL or cable is telling you how fast their services may be, if your building or area is not wired correctly, their promises will prove meaningless.
4. Be comfortable with the available professional services.
While you can access international lawyers from just about anywhere via the Internet, the other physical services you may need (notary public, copy centers, translators, IT, etc.) will be harder to find — not impossible, but again, harder than in the coastal export centers.
5. Become well-versed in relevant interprovincial tariffs.
This is something to look at with China’s inland, rather than when considering other countries. Interprovincial tariffs are an often overlooked problem in China. The country is much more like a group of loosely affiliated states than a unified United States. There is a great deal of regional and provincial protectionism. This translates into fees and transportation limitations on many products moving between provinces. Some items — wood, some foodstuffs and even electronics, for instance — are more sensitive than others.
I am going to expound on items 2 and 4.
One of the things my law firm’s China lawyers are always telling our clients is that doing business successfully in China requires close monitoring both by people on the ground in China and by people back at the home office and it is good to have the people on the ground be people who started out at the home office. Will your employees be more reluctant to relocate to Shanghai or to Linfen? In which city do you think your employees will actually stay, without quitting or begging to return home? Which will be easier/more pleasant for people from the home office to visit?
If you go to Linfen, who will do your accounting? Who will do your legal work? I doubt there are any accountants in Linfen sufficiently versed in international, China, and US (or England or German or Italian or whatever) accounting to handle the taxes for a foreign owned entity. Yes, you can use someone in Shanghai or Beijing for your accounting work, but what will that do to the savings you hoped to achieve by going into Linfen in the first place? David is right that much legal work can be done outside of the city in which you are located, but some really should not be. China real estate law is local. China employment law is local. Some taxes are local. You can use a lawyer out of Shanghai or Beijing for this stuff, but that lawyer is going to need to get up to speed on the Linfen way and that lawyer is going to have to go to Linfen occasionally, and that lawyer will, in some circumstances, need to retain a Linfen lawyer to assist. It can be done, but again, what will that do to the savings you are seeking to realize by locating in Linfen?
Not saying you should not locate your business in Linfen, but, as David says:
Reasons to move should not include any version of “Because we heard it’s cheaper” or “Because other companies are doing so.” Before you say, “Of course I’d never do that,” you need to be honest with yourself. Have you done your homework and is it really cheaper?