Searching for the right site

HOW NEW REGULATIONS HAMPER SME's SEARCH FOR A SUITABLE LOCATION FOR THEIR PRODUCTION FACILITIES - AND WHAT THEY CAN DO ABOUT IT.

What do the Bohai Bay, the Yangtze River Delta and the Pearl River Delta have in common? Known to be the main destination for foreign Small and Medium Sized Enterprises (SMEs) investment, these regions around Beijing, Shanghai and Hong Kong may no longer be just that. A number of law and regulation changes make it increasingly difficult, especially for SMEs, to find a suitable investment location.

Challenges for foreign SMEs

Since January 2007, land prices in government-owned development zones as well as joint venture industrial parks have skyrocketed. Wuxi New District, for example, experienced a price increase from RMB 175 to 460 per sqm in one year.

One driving force behind these price rises is a new land policy which segments land into 15 price levels. By setting the minimum land price for an area, this strictly enforced policy restricts zones from offering illegally subsidised dumping prices. The shifting of business focus from wealthy regions to the less developed areas is another government strategy affecting land prices. For example, policy makers in Jiangsu province are actively trying to move investment from the south to the less developed north by strongly limiting industrial land quotas in the southern regions.

The development zones themselves are also increasingly selective in the types of investments they accept and the incentives they offer. Prior to an investment approval, companies must provide a feasibility report that contains investment size, product descriptions and expected tax revenues. In line with increased environmental protection efforts, the possible use of pollutants in the production process and the plant's energy efficiency have to be included in the report as well. After submitting all relevant information, companies must enter a newly introduced land bidding process: yet another way of driving prices. All of the abovementioned measurements particularly hurt SME with investments below USD 5 million, who are not the prioritised target group of development zones.

Possible strategies to cope

As it becomes more difficult to obtain land that is both affordable and logistically favourable, SMEs are in need of strategies that help them deal with the rising challenges. One of them could be renting. It requires significantly less investment and risk for a new market entrant to rent a workshop and "test the waters" than it does to purchase land from the very beginning. Depending on the location, rental prices average out at RMB 10-15 per sqm and month compared to RMB 280 per sqm for purchasing land. Fiducia's analysis of development zones in the Yangtze River Delta shows high demand for industrial rental space, especially for standard sized workshops of 3,000-4,000 sqm supporting heavy industries. If buying is still the preferred option, SMEs can consider looking to city-level or county-level development zones for less expensive land.

However, while cost is a crucial factor, the location of a production site can be just as important. Remote areas are most likely cheaper in terms of land, construction and labour costs, but their disadvantages can be a drag on operations. Infrastructural limitations or simply the distance to customers and suppliers are obvious downfalls. Inconvenient locations may also make it difficult to attract and retain qualified staff.

A key to getting into the right development zone at affordable cost is to find one where the local government favours companies from the foreign SME's industry. Having local R&D ability, being an industry leader or having above average growth potential can also turn out to be beneficial to winning approval or getting incentives. These can come in the form of low-rate financing or discount workshop rentals. Relationship-building with the director of a development zone should be another strategy to focus on. As the key decision maker, the director has an excellent contact network with the local approval authorities and the ability to create leeway in terms of investment incentives.

» Latest News Index
» Subscribe Fiducia Newsletter