China: New economic geography

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Wed Oct 06 2004 - 11:51:41 EDT

Business Standard

Monday, October 4, 2004

New economic geography

Why businesses are packing up and moving-again

Matei Mihalca / New Delhi October 04, 2004

In an earlier article published on March 22, I argued that economic activity
in China is migrating, first, northwards and, second, inland. The topic is
important: if you are investing in China, where you put your plant will be
one of the most important decisions you face-the difference between success
and failure. Much has happened since, and the subject deserves renewed

First of all, although already under way for several years, the trend has
been increasingly recognised. This recognition has come from a chain of
events: China's new leadership has explicitly shifted the focus of economic
growth to agriculture, in a move not dissimilar to the orientation of the
new Indian government, as compared to the previous BJP

In parallel, a tipping point was reached probably sometime last year when
China's hunger for industrial land cut too deep into its reserves of arable
land, causing a rise in the prices of agricultural products. Farmers,
forgotten for a decade, began to get better prices. Better incomes in the
countryside caused would-be migrants to factories in southern China to stay
home, and some workers from these factories started returning home to their
towns and villages.

In recent months, China's capitalistic southern province of Guangdong, in
particular, began to suffer from a severe labour shortage.

The region had been quietly haemorrhaging enterprises for some time, but now
businesses responded by migrating at a more accelerated pace to places with
more plentiful labour as well as land and energy, which have also been in
short supply.

By "migration," I don't necessarily mean the uprooting of factories; but, at
least for now, the decision to open new facilities elsewhere, while keeping
existing operations unchanged or on a reduced scale.

This trend has been interpreted, correctly, as a shift from one delta to
another: from the Pearl River Delta, in Guangdong, to the Yangtze River
Delta, around Shanghai.

There are also political reasons for this shift: China's leadership in the
1990s hailed from Shanghai. The focus of former President Jiang Zemin and
Premier Zhu Rongji was, then, on Shanghai and their attention acted as a

The northward migration, then, is not new, despite the recognition it is now
getting. It was a 1990s phenomenon, which is continuing. China's new
leadership, headed by President Hu Jintao and Premier Wen Jiabao, are more
interested in broad-based, well-balanced growth, and they hope to see other
regions match the prosperity levels that now exist in the South and along
the coast.

Indeed, President Hu only recently made his first visit to Shanghai since
taking office. The trend that is more important, and less understood, is
that business is moving again, since Guangdong's woes are now being
replicated in the Yangtze River Delta.

Labour and land in and around Shanghai are becoming scarce, and power
shortages are significant, so businesses are packing up. This new shift is
more complex because companies are not migrating to a new industrial centre
or cluster. Rather, they are spreading in a variety of directions, but
primarily inland and further north, in adjacent provinces.

In doing so, enterprises not only lower costs but also spread risk.
Additionally, such moves often bring them closer to markets previously
untapped to their full potential: North China, Korea, and Japan.
Transportation costs are an issue in China.

Typically, a company implants a new factory in a region that's ready for its
products. With respect to exports, it is more convenient to serve North-East
Asia from, say, Shandong or Liaoning than from Guangdong in the South or
even from Jiangsu, near Shanghai.

Hon Hai, the Taiwanese electronics company also known as Foxconn, recently
chose the city of Yantai in Shandong as its base in North China for this

Dalian in the Liaoning province-China's Bangalore -is an increasingly
important software exporter to Japan. The Shandong, Jiangxi, Anhui, and
Liaoning provinces are the four key
beneficiaries of this new and exciting trend.

In a staggering development, the most recent set of official statistics
shows that Shandong, once a sleepy province best known as the birthplace of
Confucius and a producer of tall athletes, overtook Guangdong in foreign
direct investment: US$5.4 billion vs US$4.6 billion.

The significance of this change cannot be understated-it marks the end of an
era and the beginning of another. Shandong's FDI figure represents a 114.5
per cent increase year-over-year.

For neighbouring Liaoning, FDI was up 97.7 per cent. Meanwhile, some
provinces have seen declines or no growth at all. Shanghai's FDI grew by a
pitiful 1.3 per cent.

That the government wishes to promote Shandong is clear: some of the 2008
Olympic events will be held in the city of Qingdao. Shandong is already home
to two industry leaders: Haier in appliances and Weichai in engines.

They are but two examples of the province's rising electronics and auto
industries. Qingdao, Haier's home, is considered the province's "dragon
head," and the cities of Weihai and Yantai its two "wings." You will hear
more about these cities in the future.

Factory wages in these provinces are about US$73 a month, significantly less
than the US$120 common around Shanghai or in Guangdong. To put this in
context, a mobile user in China today has an average monthly income of
US$241. Factory workers, whether in the South, coast, or inland, do not yet
fall into this category.

But it's expected that next year a Chinese mobile user's income will be
US$73 a month. In other words, ordinary workers not only in Guangdong and
Shanghai, but in locales like Nanchang, the capital of the Jiangxi province,
will qualify.

Jiangxi, too, has become a centre for consumer appliances, with companies
like TCL, Greencool, Midea, and Taiwan's Teco, making air-conditioners and
refrigerators. Top Form, the world's largest manufacturer of brassieres, is
also building new operations in Jiangxi alongside those it already has in
Guangdong and Thailand.

In terms of land, the picture is not pretty in either the Pearl or Yangtze
river deltas. Land around Shanghai costs US$100, up from US$20 only two
years ago. In Guangdong, companies apply for land but without much success.

China's cities have traditionally been home to extensive industrial
facilities. One of the trends under way, prompted by rising in land prices,
is that companies vacate these premises, turn them into offices, or monetise
them, moving elsewhere, often far out of town.

3M, for example, has been in Shanghai for 20 years, investing some US$200
million. The tangible result: four production facilities, all in Shanghai.
But loyalty has its limits. Recently, 3M announced it's building a new
factory in the city of Suzhou in the Jiangsu
province, north of Shanghai.

Unilever has gone further: its personal care products division is moving
from Shanghai to the Anhui province, to achieve a 48 per cent reduction in

Beijing, long a bastion of economic conservatism, is itself beginning to
change, largely because of the upcoming Olympics. China's government is
spending US$181 billion to upgrade the city's infrastructure. Contracted
out, some of this money is coming back into the economy, spurring demand.

The Bentley dealership is said to be one of the busiest in Asia and, on a
good day, the world. China's largest companies-in telecom, finance,
energy-are also based here and a whole ecosystem of privately-run,
entrepreneurial companies has emerged around them.

China is beginning to look very different, changing at a rapid pace.

matei_mihalca at

(The writer's column on Greater China appears on
alternate Mondays)

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