Considering Location Variations

Choosing where to start your business is obviously a crucial decision. In the end, the type of business you want determines which factors to consider. If most of your sales are in China, you obviously want to put convenience to customers at the top of your list. But regardless of where your customers are located, you need to keep some overarching considerations in mind. Just as in any country, you see variations in laws and resources from region to region. This section discusses some common factors to keep in mind as you look at various locations.

Many people classify cities in terms of development. First-tier cities are the large and most-developed cities. Second-tier cities are cities that are roughly as wealthy as places like Shanghai and Beijing but are smaller, or they’re large cities that are rapidly catching up to the first-tier cities. Third-tier cities are smaller cities that are in earlier phases of economic growth and expansion, and they’re a good deal behind first- and second-tier cities.

Finding good infrastructure

China’s infrastructure is strongest near the coast. However, its major waterways (particularly the Yangtze and the Yellow rivers) do provide good outlets from parts of the interior. The highway system is second only to the U.S.’s in terms of the number of miles laid. China is also rapidly adding to its roadways to make getting to the interior easier.

Railways aren’t the best way of transporting freight because freight trains share tracks with passenger trains. Passenger trains have the right of way. Freight trains can take much longer than they should to reach their destinations. China is adding more track, though, to alleviate this problem.

Consider how close you’ll be to suppliers or to customers (see Chapter 13). Even though infrastructure in certain parts of China is excellent, logistics is highly fragmented, so shipping can take a lot of time. In this area, the Pearl River Delta, which has almost every type of manufacturing supplier and customer under the sun, is difficult to beat. The Pearl River Delta isn’t an absolute advantage, though — you may want to set up your business in another area of the country that specializes in your field.

Locating your labor force

The supply of managerial and technical workers who are qualified (especially in terms of English ability) to work in FIEs is pretty tight. Finding these employees in the first-tier economy cities of Beijing, Shanghai, and Guangzhou is easiest.

However, luring this talent away from first-tier cities to second- and third-tier cities is fairly difficult, even though many such cities are quite prosperous. If you’re thinking about trying to attract employees away from the first-tier cities, be prepared to pay hardship premiums. Fortunately, the smaller cities in the Pearl and Yangtze River deltas, the Bohai Rim in northeastern China, and Chengdu and Chongqing are developing their own talent bases. The situation in those cities is rapidly evolving, so it really pays off to do thorough research on the labor supply there before making a move (for more info on the labor force, see Chapter 9).

Skilled workers (equipment operators and office support) are also in high demand. Fortunately, they’re less tied to first-tier cities. You can find them in most growing second- and third-tier cities, especially in the Yangtze and Pearl deltas. Many companies hire skilled workers from two-year technical schools, so you may want to look for locations near some technical schools. You may also be able to get skilled employees who have been laid-off from state-owned enterprises (SOEs).

You can find unskilled workers almost anywhere you see factories or construction projects, but they’re most concentrated in the Pearl Delta. Western companies often find unskilled laborers without much of a problem because they enjoy a reputation for good working conditions and pay.

Seeking government incentives

To find out what local governments have to offer, speak with the officials there. Incentives can mean big renminbi (RMB) for your business. You find incentives for foreign investors most often in special economic zones (SEZs — see Chapter 10 for details). If you locate in the right SEZ, you can receive a significant discount on your company’s income taxes. Within some SEZs are special export processing zones (EPZs). If you locate within EPZs, your company may enjoy reduced tariffs on imports and exports.

If a local government is really hungry for your investment (either because it’s relatively big and/or officials are just beginning to attract foreign investment), they may be willing to provide your business with additional subsidies. These subsidies can be tax subsidies or ways of defraying some of your company’s costs — for example, assistance with your factory’s construction costs. (As we explain later in “Landing your land,” you should stay away from any incentive that seems like a subsidy to purchase land-use rights!)

If your company is going to receive a decent amount of incentives or subsidies, you may want to see whether the local government will sign an investment contract with you. This contract should clearly explain all incentives your company is to receive and give you a way to enforce them. As with JV contracts, your investment contract should contain a binding arbitration clause. An attorney experienced in foreign direct investment (FDI) in China should be able to draft your investment contract.

Incentives are a common fixation. Make sure the location you’re looking at takes care of your business’s basic needs before worrying about the incentives.

Looking for experience with foreign investors

Whether a local government has experience with foreign investors can be an important factor for your business. Without experience, the government may not understand that foreign investors like consistency, transparency, and predictability. This situation may come out when you ask the government to sign an investment contract to guarantee your company’s incentives. The government may be willing to go along with signing a contract but not realize that you fully intend that they honor the letter of the contract.

If you suspect that the officials you’re dealing with don’t fully understand what they’re promising, find a way to make them understand sooner rather than later. Speak in a way that doesn’t make it obvious you know they don’t understand. Simple phrases such as “as I’m sure you know . . .” can help.

Of course, the more experience a local government has with foreign investors, the less likely the government is to give you special incentives. Perhaps you’d be better off as a bigger fish in a smaller pond by dealing with a government that doesn’t have many other foreign investors to welcome. If you do end up dealing with a government that hasn’t done much business with foreigners, clearly explain your expectations to them.