DOING BUSINESS IN SHANGHAI AND GUANGZHOU
China has always had a sense of magical appeal to many Westerners and unfortunately in business, many company executives - even those from large multinational corporations -often lose a sense of perspective. Shanghai has taken on all the appearances of a bubble economy, but as always in such situations, people are flocking there to make money while they can. Shanghai municipality is about 6340 sq km, an area that encompasses the 3924 sq km of Shanghai City and its 16 districts, plus an additional three counties and 30 islands in the Yangzi river. Shanghai is situated near by Huangpu river and Yangzi river delta region and is one of the four municipalities that are directly administrated by the central government (the others are Beijing, Chongqing and Tianjin). The Shanghai City has a population (residents only) about 14 million and that makes Shanghai the biggest city in China. The greater Shanghai area has a population of roughly 23 million. That is equal to Taiwan. Most of the people in Shanghai are urban, and have disposable income. The average annual per capita income in 2004 was US$ 2680 but according to the most newest information the GNP is now US$ 6000 depending on statistic way. There are approximately 30 000 foreign employees in Shanghai but by some estimates, there are now more than 130 000 Western expatriates living and working in Shanghai. In the space of a few short years, the city has transformed itself once again into the
vibrant commercial hub of East Asia. There are approximately 200 multinational companies regional head offices and many companies are considering to move to Shanghai. You cannot do business in Shanghai, or China, without a local. Even more importantly, you have to choose your partner very carefully. Generally the best way to find out how to set up business in Shanghai is to contact your local consular office and inquire about the opportunities and restrictions which affect people of your nationality. There are three main types of foreign direct investments in Shanghai (and all China). These are the equity joint venture (EJV), the cooperative joint venture (CJV) and wholly-owned foreign enterprise (WOFE). Collectively, they are called as foreign invested enterprises (FIEs). Apart from the above three, other forms of foreign investments are also available, such as: - foreign invested holding companies - foreign invested joint stock companies - build-operate-transfer (BOT) - international leasing - compensation trade - processing and assembling
STRENGHTS - rapid economic growth (GDP +13,5% last year) - for large companies, however, production efficiency and low defect rates are keys to competitiveness - reasonable transport and infrastructure net, a good and big port (Yangshan deep-sea port becoming), location in Yangzi river delta, two airports (Pudong and Hongqiao), good connections to other China and Asia - financial institutions - enterprise-friendly and pretty openly working city government - China’s central government supports the development of Shanghai to international economic, finance, trade and port centre - Industrial parks and export-oriented prozessing zones - cost-effectiveness, licence and permit policies progressing well, lasting labour worce - tax reliefs
WEAKNESSES - lack of competent manager level labour force with adequate communication skills, team skills, cooperation skills and leadership skills, that is a big problem
- lack of experienced labour force - transportation costs comparing to industry countries are double - corruption - bureacracy A rampant counterfeiting is one of the biggest problems facing multinational corporations in Shanghai (and all China). Such counterfeiting involves not just high-end items like Gucci or CDs, but also extends to low-end products like razors, condoms, soap, and detergent. Consumers cannot tell what is real or fake since prices are the same for both. When you pay only US$ 8 for a Gucci bag, you know it's a fake, but with 25-cent items, who's to say? The packaging is identical. This not only cuts into corporate profits but also harms brand image and reputation because of quality problems. This becomes even more dangerous when you look at medicine and pharmaceuticals or food products. One foreign accounting consultancy estimated that 7 percent of China's gross domestic product may be based on counterfeiting. Some even say that 30 percent to 40 percent of the renminbi circulating in China may be counterfeit. Chinese counterfeiters are very adept. As soon as you advertise a product in China, or introduce a new product, you can bet that the very next day, counterfeit products will be available. The more you spend on advertising, the more profitable you make it to counterfeit your product.
China's multi-layer distribution system may be to blame for omnipresent counterfeiters. The further down the distribution pyramid you go, the less control you have, and the farther west you go in China, the more counterfeit products you will find. You can even choose between high-quality and low-quality counterfeit items. Naturally, the mom and pop stores have more of an incentive to sell the cheaper variety since they charge the consumer the same price. Credit conditions are another big problem in Shanghai. Many Western companies are shocked when they look at their operations in China. They wonder why they have so many outstanding accounts receivable. People are getting credit and no one is making payments. Most distributors want to pay after they sell your products, not when they the shipment is received. It is very close to selling things on consignment. Even worse, they may wait months to pay even when they do sell your products. Western financial controls run exactly counter to traditional distribution economics in China where offering credit is the norm. You cannot tighten financial control, however, since this will put stress on the distributors. If you do so, you will open the door to counterfeiting. Western companies can still produce price and quality competitive products in Shanghai despite counterfeiting.
OPPORTUNITIES China in general and Shanghai in particular offers tremendous opportunity but it can also be fraught with danger for the ill prepared. Since 1997, the government has really liberalized things. It is much easier to get a license and anyone can import things now. You do not have to go through a special company like before. This means there are a lot more companies competing and state-owned companies are going out of business and being replaced by private ones. Because of all the competition, it is increasingly difficult to make money in Shanghai. Views are mixed but certainly before working in China there is a need for any expatriate to be finely attuned to both the political and cultural factors at play. The best advice for those considering setting up in Shanghai is to take time to study the market and network in the community before committing significant capital to any business venture. Any number of companies will offer to help - for a price -- but not all of them deliver. Indeed sometimes it is the smaller companies who are close to their clients who can do more from you that the larger brand-name firms who charge high fees for doing very little. For a multinational corporation that can afford take a long-term strategic view, plan carefully, husband your money and look for a reasonably quick return. "Shanghai looks set to be in for a period of long steady growth but certainly it will not be the get-rich-quick Mecca that has drawn many for long".
There are opportunities in the food and beverage business, according to some experts, so while there is plenty of competition in, say, semiconductors or machinery, there is a lot of demand for restaurants and hotels, from small inns right up to giant five-star complexes. The Chinese are far behind in terms of service standards and this is where Western advice and management skills will come in handy. - creating top level information connections - increasing more open capital markets - more flexibility to goods and people mobility and visa policy - tolling policy is going more flexible
THREATS Will the Shanghai bubble burst? Will it burst anytime soon? that is unlikely -- especially now that China will be hosting the 2008 Summer Olympics. It will continue to be a difficult market. The growing sophistication offers opportunities for international marketers though the mortality rate in China is high and competition is increasingly fierce, especially in Shanghai. It is becoming increasingly difficult to turn a profit. But as long as they believe there is a future in China, they still have a market. It is a bit like a pyramid scheme. As long as everyone keeps buying into the China market, there will be opportunities for companies. Once
people stop, however, the market for many foreign companies will disappear. - growing real estate prices
THE PEARL RIVER DELTA
FROM HISTORY TO TODAY
The Pearl River Delta (PRD) Zone, as specified by Guangdong Province includes Guangzhou, Shenzhen, Dongguan, Foshan, Jiangmen, Zhongshan, Zhuhai and the urban areas of Huizhou and Zhaoqing. Because its almost impossible to talk about PRD’s development without its famous neightbours, PRD plus the Hong Kong Special Administrative Region and the Macao Special Administrative Region is called The Greater Pearl River Delta (GPRD) region.
The Guangdong Province and the PRD region used to be the economic backcountry of China that lagged behind other parts of the Chinese mainland in industrial development and income levels. Beginning in 1978 the People’s Republic of China initiated reforms to open up what is now the PRD Economic Zone to foreign trade and investment, ahead of the rest of the mainland. The PRD area started to attract export-orientated foreign investment and began to engage in export-led developement. Today the area is the wealthiest and fastest growing in all of China.
Hong Kong has played a significant role, directly and indirectly, in the evolution of this area into the manufacturing powerhouse it is today. Hong Kong was the first to capitalise on the development of the PRD Economic Zone as it moved much of its own manufacturing into the mainland in the 1980s. Since that time Hong Kong has complemented the production in the mainland with its world class strengths and reputation in management, communication, logistics, finance and professional services. It is estimated that 59,000 Hong Kong enterprises have their factories in the mainland, of which around 53,000 factories are located in a cluster in the PRD, in Guangdong Province. Such a concentration of production provides job opportunities for 1.5 million Hong Kong citizens and 10 million people in Guangdong, and injects a tremendous contribution to the economic development of the PRD.
As a result, Guangdong Province has developed into one of the most important manufacturing bases in the world, while Hong Kong has successfully transformed from a centre of production into a service-oriented metropolitan centre of international reputation. Guangdong and Hong Kong have developed hand in hand into a united and complementary region of economic activities.
The total population of the GPRD is 48 million, which is divided so that there is 40.76 million in the mainland, 6.8 million in Hong Kong and 440,000 in Macao respectively (situation in the end of 2003). Because of the region’s rich and diverse past, a number of
languages are used in the GPRD area. With the increasing internationalisation and opening up of the mainland, operating in the English language is becoming more common but Mandarin still predominates in the mainland. Hong Kong is well skilled to bridge any language divide.
Even though the three main elements of the GPRD are all parts of China, they do have separate immigration policies, procedures and visa requirements, immigration laws and work visa requirements. These are however becoming more uniform to encourage travel and relocation between the three constituent parts and there is a reason for that. The Lo Wu border between Hong Kong and the mainland is one of the busiest border crossings in the world.
Guangzhou is the capital city and the political, economic, scientific and technological, educational and cultural center of Guangdong Province. It's the largest coastal city in the south of China. Guangzhou is situated in a hilly area. The topography is higher in the northeast and lower in the southwest. Its eastern and northeastern parts are mountainous areas, the center part has hills and bench terraces, and in the south is the Pearl River Delta which flows through the city. Guangzhou is a famous cultural city with a history of more than 2,210 years. In the endless river of history, there are a lot of wellknown places of historic interests, such as The Tomb of Nan Yue
Kingdom of Western Han, Guang Xiao Temple and SeaDominating Tower. The absorbability and combination of the quintessence of both traditional and foreign culture forms Guangzhou's unique style of Lingnan Culture. For example Cantonese Music, Cantonese Opera, Cantonese Cuisine, Cantonese city sight and living customs reflect the style of Lingnan culture. Guangzhou is a subtropical area and stretches over the Tropic of Cancer, with an annual average temperature of 20-22 degrees celsius. The lowest temperature is about 0 degrees celsius and the highest temperature is 38 degrees celsius. Guangzhou has a subtropical monsoon weather. As it faces the sea but backs on the mountain, GuangZhou's climate has a characteristic of warm weather and plenty of rainfall, sufficient sunlight and heat. Here summer is long, and frost season is short. Each year, the rainy season is from April to June, it is hot from August to September, with lots of typhoons, and from October to December is mild and the best season for tourists.
- rapid economic growth (GDP +14,2% last year) - one third of Chinas total export value comes from Guangzhou province - more FDIs come to Guangdong than any other province in China - the standard of living has raised significantly - the wealthiest province in China - efficient public governance
- mobile labour force - strong private sector - good infrastructure, e.g. railways, harbours, roads, new airport was built in August 2005 (Baiyun International Airport)
- industry concentrated on heavy industry - availabillity of energy is going to be problem at least couple more years - shortage of labour force - enormous differences in income levels between northern parts and southern parts of the province - corruption
- the vicinity of Macao and Hong Kong - promising service sector, especially in tourism, banking, insurance, retail
- environmental disaster - natural disaster - growing gap between the rich and the poor may cause social problems
It is fairly difficult to find major differences between these two mega-cities. They both are located in Delta region and both are important harbour and trade cities. The most obvious difference of course is the location. Shanghai is in physical and mental level closer to Beijing which might have had some influence in the past. The former president of China (Jiang Zemin) was mayor of Shanghai before he became the president, just to as an example. However, the transportation connection between these cities and to other areas of China and Asia are very good.
Shanghai and Guangzhou both grow rapidly at the moment but the future doesn’t promise such a growth for long anymore. The both cities share the same strenghts and weaknesses and one can see the similarities in opprtunities and threaths. It is hard to assume where the future FDIs will be directed, maybe even totally somewhere else.
We still believe that these two mega-cities will sustain as the China’s and East-Asia’s two leading business metropoles.