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How to Find the Perfect Location for Your
China Manufacturing Operation

by Michael Chu

 
   
 
   

Establishing a China business presence is becoming inevitable for many US firms. The strategies laid out here will give you a blueprint for choosing your home in China.

This article takes you through a thought process which helps you narrow down your choices from thousands of possible sites in China to the one that will bring you success in the market place. It presents both the quantitative and qualitative food for thoughts and is designed to help in your decision making in doing business in China.

Establish Your Own Criteria

Literally, there are thousands of possible locations in China to choose from, each with its own unique advantages and disadvantages. Not all companies will view each selection criteria the same way you do. For some, it may be Shenzhen's strong export and commercialism spirit that makes the best sense, for others it may be the Kunshan in Shanghai area that offer the best supply chain. Yet for others, the more predictable, stable environment allowed in Beijing/Tianjin market is the key comfort.

So define the goals of your China operation. Is it to reduce production cost? Is it the vast China domestic market your main aim? Are you trying to take advantage of the low cost skilled labor to set up your R&D arm there? Are you reducing back office cost functions in China? Maybe you want to achieve all the above, but with differing degrees. Establishing your own criteria early on will help focus your attention and save you time and resources.

Dealing With Local Officials

After two decades of market reform, China has gradually developed a unique dual track system where capitalism meets central planning. Within this dual track system, local government officials behave much like entrepreneurs.

They are motivated to recruit investments into their jurisdictions to build a larger tax revenue base and increase local employment. For you, local official endorsement will bring much cooperation from your potential local counterparts, and pave the way for smooth operations down the road.

Start by taking a close look at your business. Does it require government approval beyond the usual business licenses? Does your product need special government certification? Certain electronic products may need government production quote to manufacturer.

If you determine that your company has special needs, you need to develop special relationships with appropriate government agencies. In China, almost every step of your business requires some sort of government agency approval. Having a good relationship with the highest ranking official is considered a must in conducting successful business. Recognizing their dual functions as governing bodies as well as businessmen will serve you well in almost all situations.

Special Economic Zones

SEZs are set up to attract foreign direct inventments (FDI). These zones are leading China's economic development and technological advancement as well as providing attractive locations for multinational firms who desire a presence in China.

In general, SEZs boast sound management, a well-developed infrastructure, and highly skilled and efficient administrative support staff. When combined with favorable tax incentives and land deals, SEZs are catching on as some of the best options in China for foreign companies to establish joint ventures and wholly owned businesses.

SEZ are sites that were approved by either the central or local government, and are run by corresponding government agencies with special administrative staff. These zones are empowered to give special incentives for foreign enterprises located in their zone, and are widely regarded as the best places in China for foreign companies to establish joint ventures and wholly owned businesses.

State-Level Zones

Even with your focus on SEZ's, it's still a list of over 4,000 sites. So it is practical to start your study from the top by focusing on the larger, top-tier, State-Level zones, which are authorized by the central government. There are 49 state level zones located all over China, providing you with enough location choices.

These state level zones account for over 70% of all FDI enterprises in China. They are usually larger in size, supported by large local governments like Beijing, Shanghai, Shenzhen, Tianjin, Guangzhou, etc., and they attract large percentage of multinational enterprises. In general, the bigger the economy the region owns, and the higher level the SEZs are, the more central government resources these local officials can access directly.

One of such SEZ is TEDA. Tianjin Economic and Technological Development Area (TEDA) is one of the earliest state-level development zones in China and enjoys top ranking among all state-level SEZs in productivity, return on investment, export output, etc. Today, over 3300 foreign companies have settled in TEDA including forty Fortune 500 companies such as Motorola, Toyota, Nestle, Pepsi and Coca-Cola. Major sectors include electronics, automobile, metallurgy, machinery, chemistry, textile and medicine. Like most major SEZs, TEDA is strategically located, resting along a large seaport in northern China and a convenient transportation system.

We recommend that you review the top 8 to 10 SEZs in China to get as much quantitative data as possible. Get to know contact person from each zone and get as many of the questions answered as fully as possible.

The China Road Trip

With all the background work you've done, it's now time for that all important face to face meeting with the prospective SEZ officials and staff. A China road trip is about building trust, establishing relationships and laying the groundwork for negotiations. But most importantly, it is about assessing the qualitative side of the decision making equation.

Meet with the local government officials, SEZ zone staff and potential collaborators and get a sense of what it's like. Ask a lot of questions before and during the trip and see how the SEZ staff responds to your inquiries. Get a feel for the location and people and do frequent gut check to see if you like to work with these folks. In perhaps a trip of one to two weeks of visiting 8-10 SEZs, you will need to narrow down your list to 2-3 sites.

One thing to remember on a road trip is the importance of dining with your Chinese partners or local officials. Dining occasions are used by the Chinese to get to know you, to sound you out, and to introduce other people to work with you. By keeping your relationship to the host in mind, many others at the dinner table will act accordingly in later business dealing with you. There is much to be observed in the seemingly casual dinner gatherings, in between toasts.

The Final Selection

The final selection of your future home in China is a tally of all the quantitative assessments plus the people factor.

Do all the quantitative assessments add up to your criteria? Are all the hidden costs calculated? How do you feel about working with the officials? Is the zone staff responsive to your questions? Do most of them speak English? Will there be sufficient communication between you and your China partners to ensure a smooth project? After you run through all the statistics and numbers, it's the time to ask your intuition to help you make a right choice.

One last thought: physical changes in China move very quickly, but relationship takes time to develop. Don't let your project outpace the relationship building needed to foster and sustain it.

Welcome to China and good luck.


     
   
     
   

The Author

 

Michael Chu is the founder and principle consultant of AsiaBizCo. Mr. Chu has over 15 years of international business development experience for US companies. Throughout his career, he has helped many Silicon Valley companies successfully launch projects with Asian partners, such as Canon, Ricoh, Konica, Toshiba, and Sony. For more information, visit http://www.asiabizco.com or call (510) 791-0286.

     
   
     
   
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Copyright 2005 by Michael Chu. All rights reserved.

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