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Home > Business > Columnists > Guest Column > Matei Mihalca

New economic geography

October 04, 2004

In an earlier article, 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 attention.

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 administration.

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 magnet.

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 purpose.

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: $5.4 billion vs $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 $73 a month, significantly less than the $120 common around Shanghai or in Guangdong. To put this in context, a mobile user in China today has an average monthly income of $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 $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 $100, up from $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 $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 cost.

Beijing, long a bastion of economic conservatism, is itself beginning to change, largely because of the upcoming Olympics. China's government is spending $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.

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