Where to Locate Your China Business

International lawyers

I have always been fascinated by how foreign companies decide where to locate their facilities, both in terms of country and in terms of location within a country. I love asking my law firm’s clients why they chose to locate where they did, and the following, in no particular order, are their most common answers:

  1. Our long-term partner is there.
  2. Our suppliers are there.
  3. Our biggest client is there
  4. Most of our customers are there.
  5. I studied there and I know a lot of people there.
  6. I like it there.
  7. That is where we can get the skilled workers we need.
  8. Labor costs are low.
  9. Utility costs are low.
  10. We are getting government incentives.

I am probably going to need to add availability of electricity to the list. A China Daily article,Power cuts worst for smaller businesses, talks of electricity shortages coming to Central and East China and how rationing electricity has become the order of the day:

In previous years, electricity rationing usually occurred in mid-summer and winter, when the use of air conditioners and electric heaters increases the demand for power. This year, however, the electricity supply shortages began in April because of insufficient coal supplies and a rocketing price of oil, according to Central China Grid Co Ltd, one of the largest branches of the State Grid.

More than 400 million people in Hubei, Hunan, Henan, Jiangxi and Sichuan provinces, as well as Chongqing municipality, rely on the Central China grid network, which has coal stockpiles sufficient for nine days, fewer than the recommended 15 days.

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Power shortages in Zhejiang have affected small and medium-sized enterprises since last year. To those enterprises using fewer than 2,000 kilowatts a day, power has been shut off every other day.

The article talks of how industrial electricity use is being curtailed and of how smaller enterprises are being given the lowest priority:

In Zhejiang province’s Taizhou city, small enterprises that have an annual output value of less than 5 million yuan are not allowed to use electricity between 7 am and 5:30 pm, while medium-sized enterprises that have an annual output value of more than 5 million yuan are being asked to cut their use of power every two days.

“As a medium-sized enterprise with an annual output value of over 100 million yuan, we are luckier than the smaller ones that have to raise salaries and subsidies for people to work in the night, ” said Ye Mingchun, the owner of Zhejiang Tianyiqi Shoes Co Ltd.

If this shortage sticks to the script of past electricity shortages in China, you can bet that many Wholly Foreign Owned Entities (WFOES) are going to find themselves at or near the bottom of the electricity distribution pile.

How is your electricity?

3 responses to “Where to Locate Your China Business”

  1. Why the incentives to work at night ? I would understand this kind of logic for a nuclear powered country (we often hear about electricity consumption spikes in France, where electricity is cheaper at night to mitigate these effects), but coal plants are supposed to be able to follow the demand quite closely so it should be less important in China.
    Is it still beneficial to have a stable demand ? Is there another factor I didn’t see ?

  2. to Pierre
    Coal unfortunately is also on of those electricity sources that cannot be regulated quickly. Like nuclear plants they are mostly run at high output which provides most efficiency by design. For quick changes one has to look at hydro or gas power. The latter, especially hydro, make up a sizeable portion of China’s total output, but this does not solve their biggest problem: powergrid.
    Currently China lacks a unified high-voltage grid meaning that they do not have an efficient way of managing their demand and consumption – regions inside Chine are not necessarily interconnected. Building a UHV grid is a national priority but the timescale for that is the next 10 years.

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