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China's Interior Is Missing Some Parts

By Dan Harris and Steve Dickinson

A couple years ago, I attended an incredibly bad China seminar in Seattle (one of the speakers got me in for almost nothing and I really needed the CLE credits) at which one of the speakers essentially told everyone to locate 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. The Sichuan food is really cheap and good there. 5. Look at all these pictures with me smiling. 6. Ford is there. Intel(??) 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 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: 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 an 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 overal legal system in Chongqing .... how does it, let's say, compare with Shanghai and do you think it relevant for companies to consider this. A: Well I am sure Ford considered this when it chose to go to Chongqing. I will 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. It's like Hillary in William Dodson has an article out in Eurobiz Magazine, entitled, "Parts missing: China's interior still requires systems upgrades for it to become viable for international companies," that treats the issue of China's interior (mostly Chongqing) far more sensibly and with far more nuance. The article starts out 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 Dodson 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 everyone (we recently helped an IT client get set up there and they are doing just fine), but, like Dodson, I am saying that "investors need to approach potential investment locations with deep, up-front investigation and analysis of hidden costs."

Full post as published by China Law Blog on April 03, 2008 (boomark / email).

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