Selecting Your Site

Site selection is crucial to your factory, but it’s commonly an area where companies become fixated on one thing to the detriment of their overall business. It plays a large part in determining whether you succeed or fail because it affects (among other things) your ability to receive inputs, ship to customers, and hire good workers.

Here are keys to site selection:

✓	Focus on the basics you need from a site as a manufacturer.
✓	Adjust to the unique circumstances of China — for instance, less reliable transportation.
✓	Think about how comfortable you are with the local government (see Chapter 8 for info on government relations).
✓	Look at how to use the regulatory framework — for example, Special Economic Zones (SEZs) and tax incentives — to your advantage.

Hire a consultant to help you select a site. Make sure your consultant has actually worked in manufacturing, though! Some consultants recommend sites where they’re friendly with the local government or that have low taxes, even though the sites aren’t practical from an operational standpoint. Find consultants through recommendations from people who’ve done successful startups in China similar to yours.

Looking the part: Appearances can count Chad Blackwell is managing director of Kunshan Jieyang Arts & Crafts Co., Ltd. The company is located in Kunshan, a small but rapidly expanding city outside of Shanghai. As in many other booming Chinese cities, industrial land is in high demand. Although Jieyang is a small-to-medium-sized company in Kunshan, it was able to secure a choice parcel for its new factory. Jieyang’s new factory boasts an impressive and modern outward appearance that faces the street. In addition to the factory building’s attractiveness, Jieyang is putting serious effort into landscaping, including having a lot of grass and a small pond where the parcel meets the road. Blackwell is thrilled with the parcel because it’s located at the intersection of two major roads and is very close to a key highway. He believes that if his company hadn’t made the effort to build such a handsome factory, it may not have gotten such desirable land from the government.

After you have a short list of possible locations, speak with similar-sized FIEs in those locales — particularly those that are more recently established — to get a feel for their experiences. Although you shouldn’t start by asking where you can find the most accommodative government, you should make an early effort to ensure that a local government won’t do a 180 on you after you’ve committed your project money. A few short-sighted local governments can be very difficult to deal with after you’ve paid for your land.

Seeing the big picture when planning your business

One of the biggest and most common mistakes that foreign manufacturers make is to fixate on one thing when planning the business. For example, many manufacturers come into China wanting to set up in the place that’ll give them the lowest taxes. Although low taxes are obviously desirable, they should be only one component of your overall strategy. When you focus on one goal, your overall strategy and execution suffer. Remember to look at the entire picture whenever you’re making a decision and to choose the option that best balances all your goals.

Don’t make the mistake of starting with where you can get the most incentives. Take care of your manufacturing basics first! Don’t focus on cutting costs — instead, focus on maximizing profits.

Incentives may go, but the factory should stay USActive is a Shanghai-based manufacturing consulting firm whose employees have substantial manufacturing experience. Not long ago, USActive assisted an auto components manufacturer with selecting a site for a US$20 million factory near Shanghai. The client signed an agreement with an industrial park to build there. In the agreement, the local government promised the client a number of tax and land incentives. However, shortly after signing the agreement, the central government announced some changes to the tax and land laws. The changes greatly reduced the value of the incentive package. Because USActive had focused on the basics of its client’s business, the client was still pleased with the site. The site is in a growing market and is close to potential customers. It’s also near key suppliers and major transportation networks. Finally, the area has an ample labor pool, including a good deal of qualified engineers.

Remembering what smart companies look for

You’re unlikely to find any one perfect site, so you have to figure out how best to balance the various pros and cons. Here’s a list of the key things you want to make sure your site addresses.

Proximity to suppliers and/or customers

Smart companies start by asking where their customers and suppliers are. Setting up in a place that offers the easiest access to at least one of those groups simply makes sense, particularly in China, where transportation isn’t always that reliable.

There’s a good argument to favor closeness to suppliers over customers: Because China is growing so fast, supply bottlenecks are regular occurrences in many industries. If you locate in the same town as your suppliers, you get several advantages:

✓	You minimize the transportation time from suppliers.
✓	You reduce the amount of inventory you have to carry.
✓	You can develop closer relationships with your suppliers. Hopefully, when supplies are tight, they’ll make sure that you’re the first to get shipments.

The less skilled your workforce, the higher the quality of raw materials and inputs you need. Keep this idea in the back of your mind when figuring out where your suppliers are. Chapter 12 can help you find suppliers.

If your customers are in China, you wouldn’t want to set up in an Export Processing Zone (EPZ). EPZs are special zones in China that give additional incentives to export-oriented producers. If an EPZ company sells to a company located in China and outside of the EPZ, the transaction will cost an additional few percentage points of the product’s price.

Reliable utilities

Smart companies look for reliable utility supplies. In some parts of China — particularly near major cities — the government rations utilities during peak demand periods. Peak demand for electricity occurs during the summer.

Ideal labor pools

Think about the local workforce. The government is offering all kinds of incentives to “go west.” Unfortunately, workers in places like Chongqing usually need a lot more training than workers in the Shanghai area do. (Logistics and transportation tend to be more complex and costly, too.)

Areas that have a lot of laid-off SOE workers offer experienced workers; however, some foreign investors believe that retraining former SOE workers is harder than training laborers fresh off the farm.

Knowing how government can help

Interested local governments can add value by doing a good deal of hand-holding while you set up. (See Chapter 8 for a comprehensive discussion of developing government relations.) We use the word interested instead of good because some large local governments may be good in terms of transparency, speed, and fairness, but may not offer small investors as much individual support.

China has a lot of regulatory red tape to deal with (see Chapter 7 and the upcoming section on bureaucracy), but if a local government is really interested in having you invest, officials can guide you through the numerous processes. They can also introduce you to various service providers, such as construction companies.

Avoiding site pitfalls

Here are two big no-no’s when you’re looking at sites:

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Going for sites that have electrical poles on the land: The electrical grid is a state-owned asset, and the local government doesn’t have the authority to move those poles at its whim. Therefore, you may end up owing the grid company a lot of money to move those poles. Check into nonelectrical poles on the land, too. Local governments can move some types of poles without a big deal; others take more work.

✓

Choosing sites that have people (usually subsistence farmers) living on them: Local governments used to relocate residents (they supposedly compensated them). However, this is now a hot-button political issue in China. Many local governments are hesitant to relocate residents now. Either way, you should think twice about buying land that could cause controversy with the residents.